Capital Markets Recap – July 17, 2026

Have we seen a meaningful shift in the interest rate narrative after softer-than-expected June inflation data substantially reduced expectations of a July Federal Reserve rate hike? Both CPI and PPI surprised to the downside, giving Treasury securities and Agency MBS a strong boost, with mortgage rates following Treasury yields lower despite intermittent volatility tied to renewed tensions in the Middle East. While geopolitical headlines kept energy markets in focus, oil prices ultimately retreated, helping preserve the broader bond rally. Technical factors also played a role as the 10-year Treasury yield encountered resistance near 4.60 percent, reinforcing the view that rates may remain range-bound until the next major economic event/catalyst.

Economic data continued to paint a picture of remarkable resilience rather than weakness. Retail sales rose 0.2 percent in June, weekly jobless claims remained exceptionally low at 208k, manufacturing surveys from both Philadelphia and New York posted surprisingly strong gains, housing starts surged, small business optimism improved, and the Federal Reserve’s Beige Book described an economy growing at a modest but steady pace. Although import prices came in stronger than expected, the details remained consistent with a benign reading for the Fed’s preferred inflation gauge, while building permits softened and mortgage applications continued to decline as mortgage rates remained elevated near 6.65 percent. In aggregate, the data reinforces the notion that inflation is easing without a meaningful deterioration in economic activity, allowing markets to largely remove a July rate hike from consideration while leaving September dependent on incoming data.

Federal Reserve officials worked to temper market optimism by emphasizing that one month of encouraging inflation data does not establish a lasting trend. Fed Governor Lisa Cook, Kansas City Fed President Jeff Schmid, and Dallas Fed President Lorie Logan all stressed that inflation remains above target and that energy prices, tariffs, and geopolitical risks could quickly reverse recent progress. Chairman Warsh’s first congressional testimony offered few policy surprises but reaffirmed the Fed’s commitment to restoring price stability while introducing new task forces aimed at modernizing the central bank’s policy framework, data analysis, communications, and balance sheet strategy. The next two inflation reports are likely to determine whether policymakers remain comfortably on hold through year-end.

Mortgage credit availability tightened again in June as lenders pulled back on higher-risk FHA and VA refinance programs, even as affordability challenges continued pushing a growing share of borrowers toward government-backed financing through Ginnie Mae. That changing issuance mix is reshaping mortgage-backed securities, with investors increasingly exposed to borrowers with lower credit profiles, higher delinquency rates, and different prepayment characteristics than conventional pools. Meanwhile, the Federal Reserve continued its gradual exit from the mortgage market through passive runoff, reducing Agency MBS holdings by nearly $18 billion during June without creating meaningful market disruption, as elevated mortgage rates continue to suppress refinancing activity and slow prepayments.