The recent plunge in interest rates has marked a pivotal shift from the high rates witnessed at the end of 2023.
Over the past three months, there has been a steady march toward lower rates, with the business market finally overcoming what had previously seemed like false starts.
In the world of 10-year Treasury yields, this period represents the third serious attempt to drop more than half a percent since rates began their upward climb in 2022.
The previous two attempts ultimately faltered, but this time, the trajectory seems more hopeful.
From May through July, the economic landscape appeared cautiously optimistic. Improved inflation data had the Federal Reserve feeling increasingly confident about potential rate cuts, although they maintained patience due to a robust labor market.
However, this week’s job report has significantly altered expectations.
Nonfarm payrolls rose by just 114,000 in July, well below the forecasted 175,000. The unemployment rate edged up to 4.3% from 4.1%, while wage growth slowed to 0.2% from 0.3%, reaching pre-pandemic levels.
These figures, coupled with disappointing jobless claims and a weaker ISM Manufacturing Index earlier in the week, spurred a rally in bonds and rates.
Traders, anticipating a modest rate cut by the Fed, now foresee a more substantial reduction.
This week saw one of the most significant single-day drops in average mortgage rates in the past two decades.
Looking ahead, the path remains uncertain. Further rate improvements hinge on more downbeat economic data, with few major reports imminent.
The ISM Services Index on Monday and the Consumer Price Index (CPI) next week are the key reports to watch.
The market is now second-guessing the Fed’s recent decision to hold steady and wondering if a catch-up might be in order by mid-September if economic trends continue to weaken.
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