Time to confess — I may have been too optimistic about the financial markets’ initial reaction to last week’s FOMC decision to keep the benchmark rate unchanged with the possibility of a rate cut in the near future. “The bond market couldn’t be happier with Powell and company this week,” as I stated in the August 2 edition of Behind the Numbers, was true for about a day. Once the information and the disappointing Friday job report was released, the markets’ outlook changed dramatically. The markets became disgruntled, deciding the Fed was behind the curve, and recession was imminent if not already in progress. The increase in the unemployment rate to 4.3% triggered the Sahm rule, an indicator that correlates a change in the unemployment rate to the onset of a recession. Federal Reserve Chair Jerome Powell discounted the rule as a “statistical irregularity” and even the originator of the rule said the U.S. is not in a recession. Yet, the equity market took the opportunity to throw in the towel and force a (much needed?) correction anyway.

Treasury yields saw their largest single-day drop in more than a year. The destruction was enhanced by the unwinding of the yen carry trade — a technical strategy involving borrowing against the Japanese yen and investing in higher yielding assets. The bottom line after a week of turmoil — the world is not coming to an end; the markets have stabilized and the expectations for a rate cut have increased. The futures market currently expects a greater chance for a 50-basis point cut in September than a 25-basis point cut. Additional cuts are also expected in November and December.

ISM – Manufacturing and services activities differed again in July. The ISM index of manufacturing fell the most in eight months as production dropped to a four-year low and employment shrank the most since the pandemic. The services index, on the other hand, moved back into expansion territory with employment, new orders and activity improving. Prices were higher for both manufacturing and the services industry. The rebound in the services sector helped alleviate growing concerns about a hard landing and gave the financial markets a small lift this week.

Mortgage Rates – If you originate mortgage loans, get ready for an influx of inquiries. The 30-year FHLMC mortgage rate fell to 6.47% this week, the lowest level since October 2023. The decline is already showing up in mortgage applications — weekly applications climbed 6.9% to the highest level since the beginning of the year. The bulk of the activity was for refinancing, which surged nearly 16%. Applications to buy a home increased 0.8%, the first gain in a month. The drop in the mortgage rate equals about a $300 savings on the monthly payment of a $400,000 home. As talk of an impending rate cut increases, would-be home buyers are likely to be spurred to action. Even though the Fed’s benchmark rate has little to do with 30-year mortgage rates, rate drops of any kind create a positive psychological incentive.