Mortgage rates continued to slide this week, falling to the lowest level since September, thanks to the investors’ interpretation of the latest economic data. On one hand, labor market data showed hiring remains stable and layoffs remain low. On the other hand, job openings fell to their lowest level since March 2021 – indicating that a slowdown in economic activity could be underway. Monthly growth in the core Personal Consumption Expenditures (PCE) index – the Fed’s favorite inflation gauge – also slowed, and its annualized rate is now only slightly above the Federal Reserve’s two percent target. Factory orders also continued to trend lower. The balance of all this incoming data caused inflation expectations to move lower.

With inflation and inflation expectations continuing to move toward the Fed’s 2% target, a Fed policy pivot becomes more likely, if only to prevent monetary policy from becoming so restrictive that it precipitates an economic downturn. New data arriving in the coming months will help to clarify just how much monetary policy may need to be recalibrated. 

Long term interest rates depend on expected inflation and economic growth. So long as core inflation and economic activity continues to moderate, mortgage rates may finally start to level off. While mortgage rates are still higher than they were a year ago, the recent decline is welcome relief for prospective home buyers. Mortgage rate applications have increased for five consecutive weeks now. However, if this week’s employment report shows higher-than-expected nominal wage growth in November, then Treasury yields could surge back up, dragging mortgage rates with them.