Oil Tops $90 as U.S.-Iran Strikes Rattle Markets, Putting Mortgage Rates Back in Focus

Renewed Conflict Pushes Oil Higher

U.S. stocks opened lower Monday after the United States and Iran exchanged fire for the first time in roughly a month.

The S&P 500 was down 0.5%, the Nasdaq Composite fell 0.4% and the Dow Jones Industrial Average declined about 315 points, or 0.6%, according to CNBC.

The market reaction followed confirmation from U.S. Central Command that the United States had struck two rocket launchers on Iran’s Larak Island. Iranian state media reported that Tehran had retaliated by attacking U.S. bases in Jordan.

Oil markets responded quickly.

WTI crude traded more than 2% higher above $85 per barrel, while Brent crude rose more than 2% above $90.

That matters for mortgage markets because energy prices can feed into broader inflation expectations. If investors become more concerned that higher oil prices will keep inflation elevated, longer-term bond yields can face additional upward pressure.

Treasury Yields Are the Bigger Mortgage Story

Mortgage rates generally track movements in the broader bond market more closely than stocks.

CNBC reported that longer-dated Treasury yields rose Monday alongside oil prices. That comes after an August in which inflation concerns pushed Treasury yields to multi-year highs.

For borrowers, the concern is straightforward: a sustained rise in long-term yields can make it more difficult for mortgage rates to fall.

The Federal Reserve's policy rate is important for short-term borrowing costs, but the 30-year fixed mortgage is influenced heavily by longer-term market rates and mortgage-backed securities.

That means geopolitical developments can reach the housing market indirectly. A military escalation that drives oil substantially higher could strengthen inflation concerns, potentially keeping bond yields elevated even if economic growth softens.

The opposite is also possible. If investors view the conflict as contained and economic growth weakens, demand for Treasuries could eventually push yields lower.

$100 Oil Would Raise the Stakes

Tom Hainlin, national investment strategist at U.S. Bank Asset Management, told CNBC that current oil prices were elevated but not necessarily high enough to materially damage the economy.

He said oil in the $80-to-$90 range was not sufficiently restrictive to collapse economic activity, while a move above $100 could become considerably more problematic.

For mortgage professionals, that distinction is important.

A temporary oil-price increase does not necessarily change the housing outlook. A sustained surge could be different because energy costs affect household budgets, transportation expenses, business costs and inflation expectations.

That could create an uncomfortable combination for the Federal Reserve: weaker economic activity alongside renewed inflation pressure.

Wall Street Still Heads Toward a Strong August

Despite Monday's decline, the broader stock market remained on track to finish August higher.

The Dow was up more than 1% for the month and was headed toward its fifth consecutive monthly gain. The S&P 500 was up roughly 2%, while the Nasdaq had gained about 3%.

Technology stocks led the advance. The S&P 500 technology sector was up nearly 6% for August, while Nvidia had gained more than 7%. Microsoft was up 9% and Micron Technology had risen about 14%, according to CNBC.

The resilience of equities highlights an important distinction for mortgage professionals: a strong stock market does not necessarily translate into lower mortgage rates.

Mortgage rates depend much more directly on inflation expectations, Treasury yields, Federal Reserve policy expectations and mortgage-market pricing.

Inflation Remains the Critical Variable

August also brought renewed concern about inflation.

The Treasury Department announced plans to increase debt repurchases in an effort to help address pressure in the Treasury market, but longer-term yields remained elevated.

Federal Reserve Chairman Kevin Warsh added to the inflation debate Friday, saying recent inflation readings did not convince him that underlying trends had meaningfully improved.

The combination of inflation uncertainty and renewed geopolitical risk leaves mortgage-rate watchers with several variables to monitor as September begins.

The next major economic data point is Friday's August employment report. Manufacturing and services data are also scheduled for release this week.

Those reports could influence expectations for monetary policy and, consequently, the bond market that helps determine mortgage-rate direction.

What Mortgage Professionals Should Watch

The most important indicators heading into September are likely to be:

• Oil prices: A sustained move toward or above $100 could increase inflation concerns.

• Long-term Treasury yields: Continued increases would make a meaningful decline in mortgage rates more difficult.

• Inflation data: Evidence that price pressures are easing could support lower yields.

• The August jobs report: Labor-market weakness could strengthen expectations for monetary easing, while unexpectedly strong employment could complicate that outlook.

• Federal Reserve expectations: Markets will continue recalibrating the path of monetary policy as new economic data arrive.

For lenders, originators and borrowers, the immediate takeaway is that geopolitical volatility has added another layer of uncertainty to an already complicated rate environment.

The next test comes with the incoming economic data. If oil remains elevated while inflation proves sticky, mortgage rates could face renewed upward pressure. If the conflict stabilizes and economic data weaken without a meaningful inflation resurgence, Treasury yields could have more room to decline.

For now, the direction of oil and long-term Treasury yields may be more important to mortgage markets than Monday's stock-market losses themselves.