Jason Shue/1st Nations Mortgage Corp

FED SAYS INFLATION AND RATES ARE HIGHER FOR LONGER

This past week the Federal Reserve decided not to cut rates and shared their updated forecast on the economy. Let's discuss what was said and what's ahead for the upcoming week.

Higher for Longer Continues

The Federal Reserve met last Wednesday and once again decided to make no change to interest rates. The markets widely expected this, but what caught many off guard was the Fed's updated summary of economic projections.

This is where the Fed gives its quarterly update on where it sees unemployment, economic growth (Gross Domestic Product), inflation, and where interest rates are headed for the next couple of years. There were a couple of big surprises. First, the Fed believes inflation may not come down any further for the rest of the year. And because of this, the Fed lowered its forecast of interest rate cuts from three this year to just one.

At the same time, they maintained their forecast for economic growth and the unemployment rate which are expected to come in at 2.1% and 4%, respectively, at year's end.

Hawkish Press Conference

Thirty minutes after the Fed statement was released, Fed Chair Powell held a press conference, and here he amplified the position of keeping rates higher longer until inflation moves sustainably towards their goal of 2%.

Despite acknowledging that the jobs report likely overstated the strength of the labor market, the sector market remains tight with unemployment at historically low levels. Mr. Powell also shared he sees no recession on the horizon.

CPI and PPI Come in Low

The Fed calling for inflation to potentially rise from current levels took some of the shine from the low Consumer Price and Producer Price Index for May readings midweek. Inflation readings with or without energy could likely be a one-off in May, as oil prices are already up 10% in June near $80 a barrel.

The near-term outlook for rates is uncertain now that the Fed said it's still higher for longer. Longer-term rates should continue to gradually move lower as the economy continues to cool and unemployment rises.

SHORT WEEK, TALL PROBLEMS FOR RATES

This past week interest rates moved sharply higher in response to a host of unfriendly bond news. Let's discuss what happened and what to watch for in the weeks ahead.

We Need More Revenue

This past week was shortened due to the Memorial Day holiday, but it was filled with tall problems which caused rates to spike. It all started on the Friday before Memorial Day when Treasury Secretary Janet Yellen told the world that the path for rates is higher, and we need more revenue.

This was an important statement as it highlights our deficit spending and our need to sell more treasury debt to fund our government.

The debt sales were tested this past week and ended up being a main driver for the spike higher in interest rates. The Treasury sold $183B worth of 2,5 and 7-yr Notes and the auction results were poor where buyers demanded higher interest rates to purchase all the debt. As Treasury yields move higher, mortgage-backed security prices drop, thereby elevating home loan rates.

Higher For Longer

Since the Fed Meeting back on May 1st, where the Fed Chair Powell said they are not hiking or cutting rates, many officials have since been pouring cold water on the idea that a rate cut is coming soon.

This past week, we heard comments like "Don't count out a rate hike" as the next move and "higher indefinitely" was uttered by another Fed official. This means those betting on a rate cut soon might want to reassess their position as the chance for the first cut has now been pushed back to November. And as we have seen over the last year or so, if inflation remains stubbornly high, we may not see a cut at all in 2024.

Higher Oil

Yet another problem for interest rates and the overall economy is energy prices. Oil hit $80 a barrel last week. This is significant as oil and 30-year mortgage rates tend to ebb and flow together. When oil prices edge higher so do mortgage rates. Why?

High oil prices are inflationary. If inflation readings remain near current levels or even edge higher, there is no way the Fed can cut interest rates which means higher for longer.

Consumer Sentiment Moves Higher

Bonds hate inflation, bonds hate more bonds and bonds hate good news. Despite the uncertainty about higher interest rates and elevated oil prices, the consumer sentiment reading last week was an upside surprise as people felt a bit more optimistic - breaking a trend of recent pessimism.

We should take the Fed at its word that rates will be higher for longer. Deficit spending and high energy prices will help fuel this notion.

THE QUIET BEFORE THE STORM

This past week interest rates held steady as the markets brace for the Fed meeting this coming Wednesday. Let's discuss what happened and look at the big news events ahead.

The Quiet Period

A lot of the big market moves and volatility in the financial markets have been sparked by Federal Reserve members speaking about monetary policy. The good news this week? It was the blackout or quiet period for the Federal Reserve, where Fed members have no speeches or make no comments on monetary policy for 10 days leading into The Fed meeting.

Bottom line...Fed members did not speak, and markets didn't have to react, and that was good news.

Global Rate Cuts Coming

Economies around the globe are seeing slower economic growth and lower inflation. For this reason, other countries have either cut rates or will begin cutting rates as soon as June. This is going "against the grain" with what the U.S. is doing as we do not expect to be cutting rates until later this year because our inflation remains a bit higher and more persistent.

New Home Sales Jump

In March, New home sales jumped to the highest levels in six months. This leading indicator highlights the pent-up demand for housing as new home sales are counted at the signing of a contract.

Since this report, mortgage rates hit the highest levels of 2024, so it remains to be seen if the strong buying demand will continue.

Demand for U.S. Short-Term Debt

Last Tuesday, the Treasury Department sold a record $69 billion worth of two-year notes. The good news? The buying demand was solid and the yield on the 2-year Note remained beneath 5%.

This is important to follow because if the 2-year Note can remain beneath 5%, it could limit how high long-term rates, like mortgages, rise.

The Buck is Strong

In response to our relatively strong economy and the Federal Reserve not cutting rates in the near term, the U.S. dollar is very strong relative to other countries. One benefit is some downward pressure on oil prices which are priced in dollars. If oil prices go down, that brings less inflationary fears, and this is good for bonds and interest rates.

A strong U.S. dollar also makes imports less expensive, which is good for inflation.

4.60%

The 10-year Note has traded in a range between 4.60% and 4.70%. For long-term interest rates, like mortgages to improve, we need to see the 10-year Note move beneath 4.60%. A move above 4.70% would be bad and likely bring another spike higher in interest rates.

Interest rates are trying to find a peak and next week's Fed Meeting and Treasury Refunding announcement may determine if the peak is here.

RATE SPIKE

This past week interest rates ticked up to the highest level since November on continued inflation fears.

Lack of Confidence

Federal Reserve Chairman Jerome Powell shared this on Tuesday:

"We've said at the FOMC that we'll need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy. The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence. Right now, given the strength of the labor market and progress on inflation so far, it's appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us. If higher inflation does persist, we can maintain the current level of interest rates for as long as needed."

Essentially, Powell is saying recent inflation numbers are elevated, it's not clear that inflation is moving towards their goal, and they are going to keep rates higher for longer.

The bond market reacted poorly to this quote, with the 10-year Note spiking to 4.70%...the highest level of 2024.

The financial markets may also be losing "confidence" that the Federal Reserve can get inflation back down towards 2%, without the U.S. economy slipping into a recession because of "higher for longer" rates.

"Sell in May and go Away" Coming early?

Stocks did not like the spike in interest rates and endured a sharp selloff, sending indices to the worst levels since February. There is a saying in the financial markets, "Sell in May and go Away", where investors sell stocks during May to avoid the Summer months and repurchase stocks in the Fall. Maybe investors took this spike in rates and growing uncertainty as an effort to kick off this phenomenon a few weeks early. We shall see.

The Cure for Higher Rates

When interest rates spike like they have over the past week, at some point the higher yields attract investors thereby eliminating the increase in rates. We saw some of this as the 10-year Note hit 4.70% on Tuesday before falling to 4.57% by Thursday.

On Wednesday, in another sign that higher rates attract the buyers, the Treasury Department sold billions of dollars in 20-year bonds, and the buying demand was strong.

Oil Declining

We all know high oil prices are inflationary, and bonds hate inflation. Oil which recently hit $90 a barrel, declined down to $82 on Thursday. Lower oil prices were welcomed by the bond market and was another reason for some of the rate relief from 2024 highs.

Housing Impact

Housing Starts and Building Permits for the month of March came in well below expectations. With a market in need of housing inventory, this was an unwelcome weak signal as we enter the Spring housing market. With rates higher still in April, we may see home builders also express their "lack of confidence" that rates will come down.

With inflation fears elevated and the Fed backing away from a June rate cut, it is tough to see where the relief in interest rates would come from in the near-term. We will need to listen carefully to incoming data on signs that the inflation rate is cooling.

Latest inflation report comes in hotter than expected (again)

Strong, sticky price growth in CPI dampens hopes of Fed cutting rates in near term

The Consumer Price Index (CPI) came in hotter than expected in March, signaling that inflation remains stubbornly sticky and likely undercutting chances of a rate cut from the Federal Reserve in the near future.

The index, which tracks the average change over time in consumer prices for certain goods and services, was up 0.4% in March on a seasonally adjusted basis, according to the U.S. Bureau of Labor Statistics. That’s flat from February, while year over year, the CPI rose 3.5%, the largest annual gain since September and still handily above the Fed’s 2% goal.

Buoyant inflation was fueled by shelter and energy prices. Shelter costs, which are weighted to comprise approximately one-third of the CPI, were up 0.4% from February and 5.7% from March last year. Rents have been on the downswing of late, but the inherent data lag due to the way rents are measured has left shelter inflation hot until further notice. Pick-ups of 1.7% in gasoline prices and 0.9% in electricity, meanwhile, pushed energy inflation to 1.1% in March.

Economists polled by Reuters had forecast the overall CPI with a pick-up of 0.3% month over month and 3.4% year over year. Core CPI, which omits volatile food and energy prices, stayed persistently buoyant as well, with a monthly increase of 0.4%, comparable to the previous two months. Over three months, the first quarter’s annualized rate of core CPI inflation rose to 4.5%, highest since May of last year.

March, then, marks the third straight month with an inflation report that reads stronger than desired, leaving many discouraged that the Fed’s “higher for longer” credo regarding its interest rate policy is going to stay in place even longer than anticipated — and that rate cuts won’t be as numerous as hoped this year.

“The market has been continually disappointed this year by inflation data,” said Xander Snyder, senior economist at First American Financial Corp., on Tuesday before the CPI was announced. “At the end of last year, the market was overwhelmingly expecting 6-7 rate cuts this year, compared the Fed’s expectation of 3 rate cuts. Now, the overwhelming majority of the market is expecting 3 or fewer cuts. What a difference a quarter makes.”

Now, even three rate cuts may be too optimistic an outlook. Wells Fargo economists Sarah House and Michael Pugliese now project just two 25-basis-point rate cuts in the second half of the year as their base case.

Lawrence Yun, chief economist at the National Association of Realtors, bluntly described March’s inflation figures as “very bad, which also means bad news for interest rates.”

“Mortgage rates, unfortunately, will move a notch higher and are likely to cross above 7% in the upcoming weeks,” Yun said. “In addition, the gigantic federal budget deficit will soak up more borrowing, thereby leaving less for mortgage borrowing.”

There are some rays of hope shining through the clouds in this month’s report. For one thing, while it hasn’t happened yet, the aforementioned cooling of rents should eventually lead to deflation in shelter costs, which would make a big difference in the CPI. Lower prices in the automotive sector should also manifest in the CPI in due time. House and Pugliese wrote in Wells Fargo’s post-CPI commentary that they still expect inflation to rend lower throughout 2024, though it’s likely to be a gradual process.

“If rent data calms, then overall inflation will automatically be lower,” Yun said. “It is, therefore, possible to get to the 2% inflation target by year’s end, even with bumps and delays.”

LAND OF CONFUSION

This past week interest rates moved higher with the 10-year Note yield briefly touching the highest levels of the year. Let's discuss what has happened the past couple of weeks and look ahead.

The Fed and Rate Cuts

A little more than two weeks ago, Federal Reserve Chair Powell, led the world to believe the Fed will be cutting rates three times in 2024. The Fed's dot plot, which is a rate forecast of the Fed members themselves, also confirmed three cuts before year-end.

Now, just days later, and thanks to a hotter-than-expected inflation report, and various Fed speakers, the idea of three cuts, or even one cut is very much at risk.

Two Fridays ago, the Fed's favorite gauge of inflation, the Core PCE, was released. The number came in at 2.8% year-over-year, which matched expectations. What's the problem? One - It did not come down from the previous month and remains sticky. Two - The previous month's reading was revised higher to 0.5% for the month! The 0.5% annualized means inflation would be 6%; THREE times the Fed's target of 2.00%. This completely spooked the bond market and has since put Fed members on their heels in response.

For instance, Atlanta Fed President Raphael Bostic shared that he only sees one rate cut in 2024 and that it would be coming in the fourth quarter. Other Fed members have shared similar sentiments. Where were these predictions just two weeks ago when the Fed issued its dot plot?

After the spike in rates this week, Fed Chair Powell attempted to soothe the markets by suggesting three cuts could still happen this year.

It's this lack of consensus, uncertainty, and land of confusion that is helping keep interest rates elevated.

Rate Cuts Abroad

While the U.S. tries to figure out when to cut rates, many other parts of the globe have begun or are beginning to cut rates. The latest this week was the EU, which shared that inflation has moved unexpectedly lower and June might be the right time to cut interest rates. The good news here? As economies around the globe struggle and their interest rates are lowered, that puts downward pressure on our interest rates. So, while this past week has been very unnerving about rates going significantly higher, there are many factors to consider besides inflation and the Fed.

We joke about the land of confusion, but that has essentially been the mortgage and housing world for over 2 1/2 years. Questions on "Where is inflation going?" "How is the economy doing?" and "What is the Fed going to do?" remain unanswered. We do know the old saying "The cure for higher rates is higher rates"; meaning as rates edge higher, it attracts investors who buy bonds… which stabilizes rates. Finally, the next move from the Fed will be a cut and it will probably come sooner rather than later. Better days ahead.

FIRST QUARTER OF 2024 IS ENDING

Fed Members Not Aligned

At the most recent Fed Meeting, Fed Chair Jerome Powell led the markets to believe there will be three rate cuts in 2024. The Federal Reserve's dot plot, which is a forecast of interest rates amongst the members, also suggested three rate cuts.

Yet to start the week, Atlanta Fed President Rafael Bostic, said he only sees one rate cut in 2024. This lack of unity, amongst the Fed members, creates volatility and uncertainty, which we continue to see in the financial markets.

The Global Slowdown

Interest rates are like bad economic news here and abroad. Over the last couple of weeks, we have seen numerous warning signals from major countries as they either have entered a recession or are threatening to do so. At the same time, there have already been surprise rate cuts by other central banks around the globe, like Switzerland, to stave off a slowing economy. This is important because if rates around the globe move lower in anticipation of a local recession, it puts downward pressure on our interest rates here at home.

Big Friday News, Markets Closed

On Friday, the financial markets are closed in observance of Good Friday. Yet, there are a couple of huge headline risk events taking place. First, the Fed's favored gauge of inflation, the Core Personal Consumption Expenditure index (PCE) will be reported. The Fed wants to see this number move sustainably towards 2%. Expectations are for it to come in at 2.8% year-over-year. If the number is reported hotter bonds may not like it, the opposite is true.

At lunchtime on Friday, Fed Chair Powell will speak and offer thoughts on the economy. You never know what can be said, and how it might move the market.

With financial markets closed on Friday, we will need to wait until Fool's Day Monday, April 1st to see the reaction. Let's hope the markets don't make a fool of us.

Key Levels

Both the Treasury and the mortgage-backed security market are trading right at key levels, placing no large bets in advance of Friday's headline risk. This coming week may determine whether interest rates improve further or get turned away higher.

Springtime Is Here

We are seeing housing inventory perk up across the country for the Spring home-buying season. Many people are finding opportunities with rates stabilizing off the highs of last Fall. Pent-up demand is being released as people finally say life goes on.

The Spring home-buying season may pose a terrific opportunity for those looking to make a move. Interest rates are not expected to decline sharply in the absence of a surprise recession signal. So, it may be wise to take advantage while others may sit on the sidelines.

FED RATE CUTS COMING…SO THEY SAY

The Federal Reserve met this week and reaffirmed rate cuts are coming but, how many and why? Let's discuss what happened and look into the week ahead.

Mixed Fed Messages

On Wednesday, the Federal Reserve met and decided to once again pause and not cut rates. This was widely expected, as inflation has been reported higher than expected of late. It wasn't the lack of action which moved the markets, but the forecast The Fed provided in their statement which helped both stocks and rates improve.

Fed's Forecast

Every three months, the Federal Reserve issues their economic forecasts. This is where they adjust their outlook on the economy, unemployment, inflation, and the path for interest rates. So, what is the Fed thinking?

The Fed now sees economic growth stronger than expected, which is a good thing, and it removes the near-term threat of a recession. They also believe unemployment will come in lower than previously forecasted and inflation will also come in higher than forecasted.

The head scratcher in all of this is that despite the Fed seeing stronger growth, less unemployment, and more inflation, they held their forecast to cut rates three times this year.

With just 6 Fed meetings remaining in 2024, it means rate cuts are coming soon. How soon? The financial markets are pricing the first rate cut in June with a current probability of near 75%. This will of course change as economic readings are reported.

Slowing the QT

In a measure that may help interest rates improve down the road, the Federal Reserve said they are going to start slowing their balance sheet reduction, quantitative tightening (QT), very soon. Part of the upward pressure on long-term interest rates the past couple of years has been QT. So, less QT, could be a good thing.

The Market Reaction

Interest rates improved modestly, and stocks hit all-time highs once again. You can see the chart of mortgage-backed securities below which highlights the nice price gains and rate declines this week.

4.35%

The 10-year Note moves up and down with mortgage rates and it is easy to follow. Watch 4.35%. If rates move above this level, they will be going higher still. The good news? As of press time, rates remain beneath that level.

Rates have improved this week and after the Fed's call for cuts, Should we expect lower rates ahead?

LESSONS LEARNED AS MARCH BEGINS

This past week, interest rates held steady amidst a slew of market-moving events. Let's discuss what happened and see what lies in the week ahead.

Fed Has Been Right

Over the past couple of months, the bond market has adjusted to the idea that the Fed will only be cutting rates three or four times this year. The first of which is likely to happen in June. This is the main reason why the 10-year Note yield has climbed from 3.85% to 4.30% and 30-year fixed mortgage rates are back above 7%.

The Fed's Favored Gauge of Inflation

On Thursday, the Core Personal Consumption Expenditure (PCE) Index was reported and met expectations at 2.8% year-over-year. The bond market breathed a sigh of relief upon this report as there were fears of a hotter than expected reading heading into the release.

The Fed wants the 2.8% to move significantly towards 2% before cutting rates. Eighteen months ago, this reading was twice as high, so it does appear like inflation continues to moderate despite the recent fears of re-acceleration.

If this reading continues to decline, we should expect the Fed to cut rates, which should ease pressure on long-term rates.

Debt Remains an Issue

Early last week the Treasury Department unloaded a record amount of two-and five-year notes, a total of $127 billion sold within a couple of hours and the bond market didn't like it. The overwhelming amount of new bonds or supply that is being sold due to our deficit spending, has added weight on bond prices and has limited any further rate improvement. Longer-term, with deficits as far as the eye can see, Treasury auctions and the bond market appetite will be an ongoing story to follow for us in mortgage and housing.

Durable Goods Orders was Not Good

A sign that the consumer may be feeling the pinch, Durable Goods Orders, purchases of items intended to last multiple years, like dishwashers and ovens, came in well below expectations. Why is this important? The consumer makes up two-thirds of our economic growth. If the consumer contracts or spends less, the economy slows and the threat of a recession rises.

4.32% Still Standing

In addition to all the news we must watch key levels, and the key level in the Treasury market is 4.32% on the 10-year Note yield. We have not seen the 10-year yield close significantly above this level in 2024. If the 10-year moves above this level rates are going higher. The opposite is true.

Fed Speak Stirring Commotion

If watching the news and numbers were not enough, the markets must navigate Fed speak. This past week it was clear that the Fed was not only noncommittal as to when rate cuts could begin, but it's unclear as to what economic signals will prompt the Fed to cut rates.

"Should the incoming data continue to indicate that inflation is moving sustainably toward our 2% goal, it will eventually become appropriate to gradually lower our policy rate to prevent monetary policy from becoming overly restrictive. In my view, we are not yet at that point." Fed Governor Michelle Bowman.

Well, as we just shared above, inflation is well into the 2's after being twice as high 18 months ago. The question the market is asking is: Has inflation moved "sustainably toward" the Fed's 2.00% target?

Rates are moving sideways the past couple of weeks and the bond market was able to leap a few big hurdles such as debt, inflation and uncertain Fed speak. The next move for the Fed will be a cut and continued progress on lowering inflation will ensure that it comes sooner rather than later.

FED MINUTES RELEASED

This past week interest rates ticked up to the highest level of the year, as the Minutes from the Fed's last meeting were released. Let's discuss what happened and look at the week ahead.

Fed Meeting Minutes Released

Last week's main event was the release of the Minutes from the January Fed meeting. Fed Chair Powell made it clear that a rate cut in March was not their "base case". Upon the Minutes being released, it became clear it was the same sentiment amongst most Fed members.

Most Fed members agreed they need to proceed carefully on cutting rates and not do it too soon as inflation remains above their intended 2% target.

Yet, at the same time, some Fed officials expressed concern about keeping rates too high for too long. This lack of consensus and mixed messaging highlights the uncertainty surrounding where inflation and the economy are headed, and when rate cuts are coming.

As always, the Fed reiterated they will be data-dependent and will rely on incoming inflation and economic readings to determine if and when to cut rates. The market is currently pricing in a rate cut this June, which is a lot different from a March cut priced in just one month ago.

So overall the Fed confirmed what we knew back in January - rate cuts are off the table for now and they need to see more disinflation for the Fed to move rates lower. But there was one note that could help long-term rates like mortgages in the future.

"Noting reductions in overnight reverse repo usage many officials said it would be appropriate to start in depth balance sheet reductions at next meeting." FOMC Minutes Feb 21 2024.

The Fed's balance sheet reduction is another form of tightening monetary policy, and it is a reason why long-term rates, especially mortgages, are higher. If the Fed starts to slow balance sheet reduction, it could lead to stabilization and possibly improvement in long-term rates.

Debt Everywhere

As mortgage and housing professionals, we must watch events around the globe. On Wednesday, during a day with not much news here outside the Fed Minutes, a German bond auction went off poorly and caused rates around the globe to rise.

Shortly thereafter, our Treasury Department sold $16 billion worth of 20-year bonds, and that auction also went off poorly… meaning investors needed to be compensated with more yield to buy the bonds. As those rates move higher, it causes mortgage rates to move higher as well.

LEI is BAD

The Conference Board's Leading Economic Indicator report showed the U.S. slowed quickly between December and January, highlighting the uncertainty around the strength of the economy. On one hand, we have strong labor market data, and on the other, we see numbers that suggest recession threats rising.

4.32%

The 10-year Note has a yield existence at 4.32%, which held yields from going higher the last week or so. If that level holds, it will keep long-term rates from moving higher. The opposite is true.

Uncertainty exists in the financial markets as to the strength of the economy and when the Fed will be able to cut rates. This means in the near term, any improvement in long-term rates may be short-lived. Upon clear data and direction, we will see further stabilization in interest rates.

INFLATION NEWS GIVES BONDS THE BLUES

This past week interest rates spiked to the highest levels since November. Let's review what happened and what to watch for in the week ahead.

Higher inflation, Higher rates

The high-impact Consumer Price Index (CPI), a closely watched gauge of consumer inflation, was reported higher than expectations. The headline reading, which includes food and energy, was expected to come in at 2.9% year-over-year, but instead came in hotter at 3.1%.

The all-important core reading, which excludes food and energy, came in at 3.9% year-over-year, still well above the Fed's target of 2%. Bonds and rates loathe inflation, and they didn't like this number. In response to the reading, the 10-year yield spiked from 4.18% to 4.31% in the matter of moments. And mortgage-backed securities, which drive mortgage interest rate pricing, fell to their lowest levels since November.

What caused the high reading of inflation? Shelter. The shelter component of Core CPI made up nearly 70% of the 3.9% climb in prices. There has been a lot of speculation that rents are declining, and it takes time for it to seep into the consumer price index. We haven't seen that happen just yet.

Fed's Next Move

This hot inflation number certainly creates an issue for the Fed. Back in 2022, the Fed said there would be "pain" and that higher rates were needed to slow economic growth and elevate unemployment so that it could tamp down demand and lower prices. Here we are seven months after the 11th rate hike and unemployment remains below 4% and inflation is near 4%. Yes, prices have come down from much higher levels, but did the Fed rate hikes make that happen? Looking through this lens, one would ask, how does the Fed cut rates? They will certainly not cut in March and right now the Fed Funds Futures have already removed two of their six forecasted rate cuts this year from the table.

This uncertainty and volatility surrounding economic readings and the Fed's next move is what has increased instability in the bond market and interest rates.

Japan Enters Recession

Last Thursday, Japan, the world's third largest economy, reported it entered a recession. This is happening just as China is mired in an awful deflationary slump and property crisis. Recessions generally lead to low economic activity and lower inflation. So, if the globe slows down and prices decrease, we import lower prices which could help limit how high rates increase.

Price Discovery Mode

Last week, the 10-year yield broke out of a range, and above 4.18%, which led to a spike in yields. The market is in price discovery mode, trying to assess what bonds and interest rates are worth with inflation threatening to move higher. Soft economic data will allow rates to come back down. The opposite is true.

Interest rates broke above key levels and are now waiting for the next high-impact reading to determine whether this spike and yield is justified or not.