Mortgage Rates Outlook July 22, 2024 — Key Inflation Report Friday

Today’s Market

One-Liner

Most investors do not expect the Federal Reserve to unveil a cut to general interest rates after its next meeting on July 31. But many are very optimistic for a September 18 cut. For that to happen, we’ll need consistently good inflation and employment reports between now and then. And a key one lands this Friday. That’s likely to be this week’s most consequential event for mortgage rates.

What’s Driving Mortgage Rates?

Yes, Friday’s personal consumption expenditures (PCE) price index will likely be pivotal for mortgage rates this week. Not only is it the Fed’s preferred gauge of inflation, but it’s also the last set of key data before the central bank’s rate-setting committee meets next Wednesday.

However, a whole lot changed yesterday when President Joe Biden withdrew from the presidential race. We mentioned last week the “Trump trade,” which tends to push mortgage rates higher the more likely the former president is to win the race.

How come? Many investors fear that a Trump administration would increase deficits and impose inflationary tariffs. Both of those would be bad for bonds, including mortgage-backed securities, the type of bond that largely determines mortgage rates.

Yesterday’s announcement opens up a great deal of uncertainty over the next 106 days leading up to November’s election. And we should probably expect some volatility in mortgage rates as markets assess President Biden’s successor as a candidate and watch as opinion polls show changes in voting intentions.

What To Watch This Week

Let’s dig a bit deeper into Friday’s PCE price index. As always with inflation data, mortgage rates tend to benefit when a report’s actual figures are lower than markets are expecting.

All price indexes have four major components. Two of each of those measure different periods. In this case, how prices moved during June plus the year-over-year (YOY) figures, which cover July 1, 2023, to June 30, 2024.

The monthly and YOY figures each come in two flavors. The first shows changes across all the items surveyed. And the second measures “core” inflation, which is the all-items index excluding food and energy prices. These tend to be volatile and can distort the underlying inflation rate. So, economists and the Fed tend to focus on the core numbers.

What are markets expecting? MarketWatch suggests:

• June all-items PCE — 0.1% expected, up from May’s 0.0%

• YOY all-items PCE — 2.5% expected, down from May’s 2.6%

• June core PCE — 0.1% expected, unchanged from May

• YOY core PCE — 2.5% expected, down from May’s 2.6%

Three other reports this week sometimes move mortgage rates, though rarely far or for long.

The first two land on Tuesday and are purchasing managers’ indexes (PMIs) for July from S&P. One covers the services sector and the other the manufacturing one. And they’re both expected to show small declines in activity.

The third measures changes in gross domestic product (GDP) during the second quarter (April-June). It’s expected to show faster growth of 1.9%, up from the first quarter’s 1.4%. This is scheduled for Thursday and is the first of three readings, so may change over the next couple of months.

Remember, across all four of this week’s major reports, mortgage rates tend to fall on smaller-than-expected actual numbers. Higher ones can push them upward. And correct forecasts often barely move them.

Mortgage Rate Forecasts From Housing Authorities

Fannie Mae had until recently been predicting that 30-year, fixed-rate mortgages would average over 7% during the last quarter of this year.

But its June forecast brought good news. And it now expects that average to be 6.7%.

Better yet, it thinks that those rates will fall very gradually during each subsequent quarter, reaching 6.3% during the last three months of 2025.

The Mortgage Bankers Association is even more optimistic. It forecasts those rates will be down to 6.6% during the last quarter of 2024 and will average 6.0% one year later.

So, there are good grounds for hoping that mortgage rates will decrease over the long term.

But, absent some unexpected economic bombshell, they’re unlikely to do so quickly.