Rates Fell – Delivering 6 Very Important Lessons! Which Bubble Will Pop First?

An alarmingly bad “Challenger Job Cuts” surfaced today, and rates fell as a result.

Among other things, we’re seeing a 22-year high in announced job cuts, and hiring plans are down a whopping 35% over last year.

While this is bad for the economy and job seekers, it is great for this blog because it reveals 6 important lessons.

1. Fed Chair Powell’s Comments Are Almost Irrelevant. We have seen Mr. Powell make “hawkish” (“I’m not going to cut rates…”) comments numerous times, resulting in sharp rate increases. But every time that happens, after the dust settles, the market moves back to where it would have been anyway (based upon the relevant economic data that surfaces).
2. The Fed Does Not Control Long-Term Rates. Sorry to beat this dead horse again, but this is another indication of long-term rates moving down whether the Fed cuts the “Fed Funds Rate” or not. As always, it’s growth and inflation expectations that influence long-term rates – not the Fed.
3. Who Cares If The Fed Cuts Rates In December? Mr. Powell is saying he won’t cut rates in December if the government is not open and providing sufficient data – and, oddly, some analysts like Barry Habib seem concerned about that. So, while rate cuts could help the economy and short-term borrowers (such as credit cards and car loans), they don’t help those of us in the mortgage realm much.
4. It Is The Labor Market That Will Likely Bring Rates Down. There are signs everywhere that the labor market is getting weaker and weaker. The Fed usually responds to consistently weak labor reports with rate cuts, and the bond market always responds to them – with falling rates/yields.
5. Private Sector Jobs Reports Are More Reliable. Private sector reports like the Challenger and ADP reports are much more accurate than the government’s BLS report because they are not filled with estimates and statistical manipulations.
6. Mortgage Rates Don’t Always Fall With Treasury Bond Rates. Mortgage rates do not always move in lockstep with the 10 Year Treasury. The spread between the average mortgage rate and the 10-Year varies from a low of 0.45% (2020) to a high of 3.34% (2022). The average since the early 1980s has been about 1.75%. Today it is about 2.13%. Anyway, we did not see as much of an improvement in mortgage rates today as we had expected due to the spread.

Popping Bubbles – What Could Really Bring Rates Down!

While a weakening labor market and cooling inflation will likely continue to bring rates down, the bursting of bubbles could cause rates to drop sharply and quickly.

Former BlackRock manager Ed Dowd frequently posts about this, as he believes the AI bubble, the stock market bubble (related), the commercial real estate/credit bubble, and the crypto bubble will all pop.

He makes a very strong case, too, so I suggest following him. He’s so certain, in fact, that he thinks the Trump administration is very foolish to tout the strong stock market so often.

Anyway, if any of those bubbles do pop, investors will scramble into the safe haven of U.S. Treasuries, and rates will fall.