Rates at Yearly Highs: Where Will They Go from Here?

Market Overview With Rates Near Yearly Highs

The week ended with rates at almost the highest point in the past 12 months. Despite the recent soft inflation and jobs data, interest rates should have been buoyed. Concerns about the conflict in Iran remain weighing on markets. Could this lead to future inflation? 

The Federal Reserve (Fed) under Chairman Warsh is being tight-lipped about its projections for interest rates. This is causing markets to look to other sources. The US National Debt crossed the $40 trillion line this week. This is coupled with huge private corporate debt issuance, especially in the AI technology space. This extra private debt is competition for mortgage bonds and US Treasury debt and is keeping yields/rates high.

Iran Conflict Drives Oil Flow Uncertainty

On the Iran front, the official expiration of the 60-day ceasefire arrived this week. Before the conflict, about 20 million barrels of oil flowed through the Strait of Hormuz daily, according to Energy Secretary Chris Wright. That has slowed to 9 million, but flow has been made up with pipelines through the Red Sea and across land. The estimated shortfall is about 5.5 million barrels per day.

Ships are braving the Strait, many without their transponders on, so they are under the radar. This may cause the numbers to be underreported. Thankfully, softer global demand for oil, especially from China, is helping keep prices down.

Housing Starts And Permits Signal Tight Supply

We received some important housing data this week in the form of housing starts and permits. It shows that builders have been pulling back on building new supply. Starts in July fell by 12% to an annualized pace of 1.24 million, most of the decline in the single-family sector. Permits, an important forward-looking indicator, rose 5%. 

On the demand side, household formations are at an annualized rate of 1.4 million. This figure is very interest rate sensitive. We still see formation greater than starts, which bodes well for housing in the future. Active listings are at 1.1 million, still lower than the pre-pandemic 1.2 million in 2019. 

Treasury Buybacks Offer Limited Yield Relief

The US Treasury stepped up and announced that it would be doubling the size of its buyback operations, focusing on longer-dated treasuries, including 10-year, 20-year, and 30-year. The Treasury started their buy backs in 2024. They will be buying approximately $5.5 billion each month. This initially was met with lower long-term yields (rates), including mortgages.

The improvement quickly fizzled out as this massive amount of purchases pales in comparison to the massive amount of issuance occurring right now. Companies like Alphabet (Google), who are trying to fund their AI buildout, are offering yields as high as almost 7%. This is drawing funds away from mortgage bonds and US Treasuries.

Cotality Rent Report Shows Cooling Shelter Costs

Cotality released its Single-Family Rent Report for June, showing that rental prices are up 1.5% year-over-year. Last June, rental prices rose at 2.5% year-over-year. This is a clear cooling. This is important because shelter costs make up 44% of Core CPI and 18% of Core PCE inflation. Currently, these reports are showing about 2.9% in the Shelter component. That means they have about a year lag since current rents are about 1.5% and were about 2.5% last year. Hopefully, as these reports continue to catch up and we will see Core inflation reduced.

Looking Ahead: Jackson Hole And Jobs Revisions

Next week, will see some important speeches at the Fed’s Jackson Hole Symposium and the exciting employment revisions in the QCEW (Quarterly Census of Employment and Wages). Then, we can see how wrong the BLS has been.

• Tuesday, August 25: ADP Weekly Employment Data, Case-Shiller and FHFA Appreciation Reports, New Home Sales
• Wednesday, August 26: Personal Consumption Expenditures (PCE), Q2 GDP (2^nd reading), Durable Goods Orders
• Thursday, August 27: Jobless Claims
• Friday, August 28: QCEW jobs revisions, Warsh speech at Jackson Hole Symposium