Some Uncertainty at The End of an Otherwise Decent Week

The week began with some challenges for the rate market and a bounce for stocks following the US/China trade deal over the weekend. Stocks held their gains, but rates managed to move back down by the end of the week.  Thursday was the only important day in that regard with rates benefiting from weaker Retail Sales data and a well-received speech from Fed Chair Powell.

Friday began on an even stronger note for the underlying bond market (bonds dictate interest rate movement), but that didn't last long after the Consumer Sentiment data showed the highest inflation expectations since 1981.

We know that inflation is bad for rates, but do rates really care about some consumer survey? At times, yes! The rationale is that if consumers are sufficiently convinced that prices will go up for things they want to buy, they will buy more of those things sooner than they otherwise would, thus increasing prices via a scarcity of supply.  

Consumer expectations are certainly far from the best inflation indicator.  They're just another tool to flesh out the bigger picture. In this particular case, the survey wasn't as relevant as it might have been due to timing. Based on the survey's methodology the assumption is that most of the responses were recorded before the big US/China trade announcement on Monday.

Friday ended up seeing an even more compelling source of volatility. With 15 minutes left in the trading day, the ratings agency Moody's announced a downgrade of the US' credit rating. This has happened before, typically when congress is in the throes of debating the debt ceiling, a government shutdown, or in this case, the budget bill.

Due to limited past examples, there's no telling if this will still be impacting markets by the end of next week.  Some will remember 2011's example and the massive drop in interest rates that followed, but they'll likely overlook the role that the European credit crisis was playing at the time.

Because we only saw 15 minutes of market reaction, all we know is that it caused modest but swift upward movement in bond yields at the time (yields correlate with interest rates).

If we zoom the chart out a bit, we can still see Friday's jump in yields, but just barely.  It's not remotely on the same scale of volatility as the early April tariff reaction.

As for mortgage rates, most lenders didn't have time left in the day to react to the Moody's news.  Based on the underlying market movement in mortgage bonds, Friday likely would have ended with 30yr fixed rates being slightly higher than Thursday, but not as high as Wednesday.