Strong economic data, shifting interest rate expectations, and evolving policy developments were the name of the game this week. Revised Q2 GDP surged to 3.8 percent, far above initial estimates, while durable goods orders surprised to the upside and initial jobless claims dropped to 218k, indicating the U.S. economy remains resilient. However, this strength complicates hopes for additional Fed rate cuts this year. The Fed’s preferred inflation measure, core PCE, came in at +2.9 percent year-over-year, aligning with expectations but still above the 2 percent target. Despite the Federal Reserve cutting rates last week, yields have actually risen, with the 10-year Treasury yield climbing 10 basis points since the cut. Markets interpreted the Fed’s tone as hawkish, suggesting fewer rate cuts ahead, even as Chair Powell remained vague on next steps. Notably, several Fed officials voiced skepticism about aggressive easing, while Governor Miran stood out for his more dovish perspective.
New home sales unexpectedly jumped 20.5 percent in August, the fastest pace since early 2022, buoyed by modestly lower mortgage rates and aggressive builder incentives. (Take those figures with a volatile grain of salt.) Nearly 40 percent of builders reported cutting prices, and there was a significant rise in high-end home sales above $800,000, driven in part by stock market gains. However, analysts caution the spike may not signal a sustainable trend, citing the volatility of new home data and persistent inventory overhang. Meanwhile, existing home sales dipped 0.2 percent, remaining sluggish due to affordability constraints and limited supply, despite a small annual increase. The Midwest, where home prices are lowest, saw the biggest regional sales gain.
Mortgage rates rose again this week, with Freddie Mac’s 30-year and 15-year rates hitting 6.30 percent and 5.49 percent, respectively, as bond yields remain elevated. The market’s hopes for rate relief have been tempered by the Fed’s cautious stance and stubborn inflation data. Even as mortgage application volume rose slightly (+0.6 percent), affordability challenges continue to weigh on borrower demand, and the industry is increasingly recognizing that rate volatility may persist through the end of 2025. Fannie Mae projects mortgage rates to finish next year at 6.4 percent, falling to 5.9 percent by 2026. This suggests that while short-term refinancing opportunities may arise, a broad-based rate rally is unlikely.
Policy developments added to the week’s complexity. The White House warned federal agencies to prepare for a potential government shutdown, and in a major shift, U.S. Federal Housing entities withdrew from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). FHFA Director William Pulte criticized the group as a politicized distraction, reinforcing the agency’s focus on traditional housing affordability over climate-related goals. This move signals a broader retreat from ESG-centric policy in the housing finance space, especially under current political leadership. Meanwhile, Freddie Mac announced a $487 million sale of non-performing loans, part of its ongoing effort to reduce less-liquid assets from its portfolio.
Lastly, sentiment in the broader economy is showing signs of moderation. Preliminary S&P Global PMI readings for both manufacturing and services pointed to slower, but still expansionary, activity. Seasonal hiring is projected to fall to its lowest level since 2009, reflecting muted retailer demand and a shift toward leaner staffing. Despite the Fed’s first rate cut of the cycle, the bond market remains cautious, with weak demand at a 7-year Treasury auction and muted movement in short-term yields. 14 Fed officials spoke this wee, offering a mixed bag of dovish and hawkish commentary. Investors, lenders, and borrowers alike will be watching incoming data closely as the October Fed meeting approaches.