In a surprising turn of events, this week's biggest market mover for interest rates was a policy announcement by the Bank of Canada (BOC). The event was credited for prompting a re-think of the US Federal Reserve's rate outlook. Specifically, the BOC hiked rates despite about half the market believing it would hold steady.  While the odds that the Fed holds steady at next Wednesday's announcement are quite a bit better, the argument this week was that central banks might err on the side of tough love as opposed trusting that inflation would subside.   If we look at year-over-year numbers, it seems clear that inflation is subsiding.  The following chart shows both monthly and annual versions of the Consumer Price Index (CPI) at the "core" level (which excludes more volatile food and energy prices).  Core CPI is the most relevant inflation data as far as rates are concerned.  The next release is next Tuesday, one day before the Fed announces whether or not it is hiking rates again. If we zoom in on the monthly number only, we see a different theme.  Inflation is still well above target levels and still trying to make up its mind on the direction of the next move. This inflation dynamic is responsible for the division of opinion on the Fed's next move.  Actually, it would be better to think of the uncertainty in terms of the longer-term Fed Funds Rate path.  Indeed, the Fed is unlikely to hike next week (unless CPI is far above expectations).  Traders have been more interested in adjusting their expectations for where the Fed will be by the end of the year.  Less than a month ago, futures markets were betting on a full point of rate cuts by December.  As of Friday, the same metrics suggest the Fed might not be cutting rates at all in 2023.

Economic data is one of the most basic and reliable inputs for the bond market.  The bond market, in turn, dictates day to day interest rate movement.  In general, weaker economic data pushes rates lower and that was today in a nutshell. Weekly Jobless Claims came in at the highest levels since 2021 and the bond market reacted immediately.  It wasn't a huge move in the bigger picture, but enough to counteract the jump to higher rates seen on Wednesday. Bigger volatility remains a bigger risk surrounding next week's Consumer Price Index data on Tuesday and the Fed Announcement on Wednesday.

Mortgage rates continue to operate in a fairly narrow range but we've been mostly moving in one direction inside that range so far this month.  Late last week, it was the strong job creation announced on Friday that pushed rates higher.  This week has been less volatile by comparison, but rates remained under pressure to move higher today after the Bank of Canada (BOC) announced a rate hike. What's the BOC got to do with anything?  After all, I'm normally the first to tell you that mortgage rates don't care about central bank rate hikes by the time they actually happen.  And that's before we even consider that Canada's economic and monetary developments traditionally don't matter too much to the US rate market. But in this case, the market was about 50/50 as to whether the BOC would hike, so the market couldn't have been in position for a hike or a cut.  The hike offered a sort of proof of concept that a central bank could and would err on the side of higher rates in order to fight inflation.  This concept can then be applied to how the Fed might frame our own situation here in the U.S. when they unveil the latest policy announcement next Wednesday. Most lenders ended up raising rates in the middle of the day in response to the market movement caused by the BOC announcement.  We'll have to wait until next Wednesday to hear from the Fed, and until next Tuesday to see the Consumer Price Index (CPI)--the only data that has real chance to change the Fed's rate decision.

By Friday, there's a distinct possibility that you'll be tired of hearing different versions of the same story.  The plot: last Friday's jobs report prevented rates from falling back into the mid-6% range, but wasn't enough to propel rates well into the 7% range. Without much by way of highly consequential data on the calendar, it makes sense that bigger movements might be on hold until next week's dynamic duo (Consumer Price Index and the Fed) takes the stage. True to the plot, today saw very little change in the average 30yr fixed rate.  That absence of change mirrors unchanged levels in the underlying bond market.

Mortgage rates held fairly steady over the weekend.  That wasn't necessarily destined to be the case as the underlying bond market suggested another mover higher earlier this morning.  But bonds rallied after an important economic report on the services sector suggested slower growth (bonds tend to improve in response to weaker cues on the economy and inflation). This allowed mortgage lenders to set rates close to where they'd been on Friday afternoon.  Some were slightly higher while others were slightly lower, leaving the average just a hair better than unchanged. So is that good or bad?  It depends on your perspective.  It could certainly be worse considering today's rates are almost a quarter point below the most recent high seen just before the holiday weekend.  It could also certainly be better considering rates were more than a quarter point lower 2 weeks before that. In general, this is the sort of volatility and range we should expect until economic data shows a clear shift toward lower inflation and growth.  With the next major inflation report (CPI) and the next Fed rate announcement on Tuesday and Wednesday next week, rates might not be inclined to make a big run in either direction between now and then.