The bond market--which dictates interest rates--had a generally favorable response to yesterday's update from the Federal Reserve. While the Fed didn't cut rates, and while they're increasingly acknowledging that rate cuts are moving farther into the future, they still think data will evolve in a way that results in the next move being a cut as opposed to a hike. Positive momentum continued today, in spite of several economic reports that argued the opposite case. Had these reports been top tier market movers, the counterintuitive victory would have been highly unlikely. Friday is a different sort of day in terms of economic data. The big monthly jobs report is in a league of its own when it comes to labor market data, and while it may not currently be the most important report on any given month, it's a consistent 2nd place behind CPI. After the jobs report, we'll get a strong 2nd tier contender in the form of ISM's service sector index. These two reports have the power to accelerate or reverse the friendly tone seen in rates over the past 2 days. As for today, the average lender inched just barely to the lowest levels since April 12th. This wasn't the case in the first half of the day, but as bonds improved, many lenders were able to issue mid-day reprices.
Counterintuitive Rally And Asymmetric Risk
Bonds began the day in slightly stronger territory and managed to hold the gains after the early economic data which consisted of unfriendly readings in Challenger layoffs, Jobless Claims, and Q1 Unit Labor Costs. All three spoke to ongoing labor market strength with the latter adding some inflationary fuel to the fire. But the bond market is apparently tired of reacting to the alarming data from Q1 and March. Instead, the perfect adherence to previously established technical levels (4.64 and 4.57 in terms of the 10yr) suggests intraday volatility was a factor of positioning and short-covering ahead of Friday's jobs report. There is some asymmetric risk potential on Friday considering how unfazed bonds seem to be by yet another unfriendly report (with the implication being a greater willingness to chase the bid on a downbeat jobs number). Just remember, the previous sentence tells us nothing about the direction of trading--only probable magnitude.
Econ Data / Events
Jobless Claims
208k vs 212k f'cast, 208k prev
Continued Claims
1774k vs 1800k f'cast, 1774k prev
Market Movement Recap
08:34 AM 10yr up from 4.592 overnight lows to 4.621 (still down 1.3bps on the day). MBS are still up an eighth of a point, but down 2 ticks (.06) from the highs.
12:37 PM Some weakness into the 9am hour, but now at the best levels of the day. 10yr down 4bps at 4.593. MBS up just over a quarter point.
03:18 PM Flat at best levels. MBS up nearly 3/8ths and 10yr down 5.6bps at 4.578
Thursday was always destined to be the least interesting day of current week due to its lack of meaningful calendar events, but that doesn't mean we can't see a bit of volatility for other reasons. The morning hours have generally been good for bonds with overnight gains only briefly interrupted in the 9am hour. This didn't appear to be related to the 8:30am economic data as it didn't begin until 8:52am. Either way, those losses are fully erased as we head into the PM hours.
Not all, but many, capital markets folks spent their college years rolling up their sleeves. Some not so much. When originators are asked about interest rates, some LOs may use the line in the clip above: “Oh, man. I only ride them; I don't know what makes them work.” (The current STRATMOR blog is titled, “Relying on the Fed: How Did This Happen?”) Yesterday the Federal Reserve Open Market Committee (FOMC) grabbed the headlines, despite doing exactly what everybody expected them to do: leave rates unchanged. Inflation is still higher than the FOMC would like. Certainly, insurance costs, whether they be homeowner or car, are inflationary. It would be foolish to blame the Biden Administration, or any administration, for things like insurance costs, ships running aground in the Suez Canal, a drought in Africa, or what OPEC does. Such is life, and one needs to ask how much more government interference we need or want. In my opinion, a president consulting with, or instructing, the Fed on the appropriate level of interest rates is not the answer. (Found here, this week’s podcasts are sponsored by Essex Mortgage. Essex specializes in providing exceptional mortgage subservicing solutions tailored to meet your specific needs. Looking to capitalize on your excess servicing strip? Check out Essex’s servicing offerings today! Hear an interview with attorney Peter Idziak on the final rule that bans non-compete clauses in employment contracts, which the FTC ruled on last week.) Lender and Broker Products, Software, and Services
Decent Data and Palatable Powell
Bonds managed modest to moderate gains after digesting all of the morning's economic data and events. None of the reports were too exciting and one might conclude that traders were slightly more interested in buying bonds regardless of the data. Yields flat-lined in stronger territory ahead of the Fed. The announcement itself was largely as-expected. The same could be said of the press conference, but with the qualification that Powell definitely stopped short of expressing as much concern about inflation as the recent data justified. Rate cuts aren't likely any time soon, but the next move is still seen as much more likely to be a cut rather than a hike. Markets also appreciated Powell's reiteration that the Fed wouldn't hesitate to do what it needed to do based on the data/economy without considering political implications.
Econ Data / Events
ADP Employment
192k vs 175k f'cast, 208k prev
TSY refunding announcement
increases in shorter part of the curve
no increases in 10yr and up
small buyback announced
S&P Manufacturing PMI
50.0 vs 49.9 f'cast, 51.9 prev
ISM Manufacturing
49.2 vs 50.0 f'cast, 50.3 prev
ISM Prices
60.9 vs 55.0 f'cast, 55.8 prev
Market Movement Recap
08:59 AM unchanged overnight and modestly stronger after ADP/Treasury. MBS up an eighth. 10yr down 2.3bps at 4.66
09:46 AM Slightly stronger leading up to S&P PMI. No reaction afterward. MBS up 7 ticks (.22). 10yr down 3.2bps at 4.65
10:05 AM No major reaction to 10am data. 10yr yields are down 4bps at 4.643 and MBS are up nearly a quarter point.
02:18 PM Modestly stronger after Fed. 10yr down 4.2bps at 4.462. MBS up a quarter point
02:47 PM Additional gains as Powell press conference continues. MBS up half a point. 10yr down 10bps at 4.587
Wednesday brought a full schedule of events and data for the bond market to digest and bonds dictate day to day changes in mortgage rates. The morning's data was perfectly palatable, resulting in modest strength heading into the afternoon's Fed announcement. Contrary to impression given by many news headlines on Fed day, there is rarely any significance to the Fed's actual decision to hike/cut/hold steady at any given meeting by the time the meeting actually happens. Markets will have long since priced in the likely outcome based on economic data and Fed policy transparency. In other words, it was a surprise to no one that the Fed held rates steady at this meeting. Bond traders tuned in for other reasons--mainly to hear what Powell had to say at the 2:30pm ET press conference. There were a few ways Powell could have framed the recent set-backs seen in inflation data. Some analysts thought he might say more to entertain the possibility of rate hike instead of a rate cut. Powell (and, indeed, the Fed announcement itself) definitely acknowledged that inflation data meant a delay for the Fed's next move, but in the press conference, Powell reiterated that the next move was much more likely to be a cut, based on the trajectory of the data. Bonds improved and many mortgage lenders were able to re-issue slightly lower rates compared to the morning levels. The average 30yr fixed rate is still elevated by 2024's standards, but nicely lower compared to yesterday's latest levels.
Recent indicators suggest that economic activity has been expanding continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into have moved toward better balance. balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described mortgage‑backed securities. Beginning in June, the Committee will slow the pace of decline of its previously announced plans. securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
“I named my dog ‘5 Miles’ so I can tell people I walk 5 Miles every day.” This morning, I head to Yosemite National Park for some camping, hiking, and biking. National parks receive 325 million visits a year, about 4 million of which are Yosemite’s compared to top U.S. sites like the Blue Ridge Parkway and the Golden Gate National Recreation Area, both with over 15 million. While we’re on comparisons and moving around the nation, is the South rising again? Recently built housing units make up the largest share of homes in Austin, Nashville, and San Antonio, all roughly around 5 percent. It's much better than the 1.95 percent across the nation’s 50 largest metros' 75.89 million housing units built over the past two years. Conversely, new homes make up the smallest share of the housing supply in three Northeast metros: Hartford, Buffalo, and Providence. (Found here, this week’s podcasts are saponsored by Essex Mortgage. Essex specializes in providing exceptional mortgage subservicing solutions tailored to meet your specific needs. Looking to capitalize on your excess servicing strip? Check out Essex’s servicing offerings today! Interview with Caruso Home’s Christy Beck and Crib Equity’s Skye Laudari on affordability challenges and solutions from both a builder and product perspective.) Lender and Broker Products, Software, and Services Waterfalls form their own microclimates; all that mist coming off the cascading water produces the perfect environment for lush plant growth (and sometimes even wine production, as seen in the Niagara Escarpment). With the right verification waterfall, lenders can create the perfect ecosystem for success, too. That’s why, instead of relying on a single verification of income and employment (VOIE) provider, lenders are increasingly building a cascade of solutions. Read this article for an explanation of how putting consumer-permissioned VOIE data at the top of the waterfall helps lenders nearly double their verification success rate while saving an average of 80% on total verification costs.
Rising interest rates continue to constrain mortgage borrowing. The Mortgage Bankers Association says its Market Composite Index, a measure of loan application volume, decreased 2.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 1.4 percent compared with the previous week. The Refinance Index decreased 3.0 percent from the previous week and was 1.0 percent lower than the same week one year ago. Refinancing accounted for 30.2 percent of applications, down from 30.8 percent the previous week. [refiappschart] The seasonally adjusted Purchase Index was down by 2.0 percent from the one week earlier. The unadjusted Purchase Index decreased 1.0 percent compared with the previous week and lagged the volume during the same week in 2023 by 14.0 percent. [purchaseappschart] “Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, are going to stay higher for longer. No doubt, this is a headwind for the housing and mortgage markets, with the 30-year fixed mortgage rate increasing to 7.29 percent last week, the highest level since November 2023,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Application volume for both purchases and refinances declined over the week and remain well below last year’s pace. One notable trend is that the ARM share has reached its highest level for the year at 7.8 percent. Prospective homebuyers are looking for ways to improve affordability, and switching to an ARM is one means of doing that, with ARM rates in the mid-6 percent range for loans with an initial fixed period of 5 years.”
Bonds were roughly unchanged overnight, but began to improve modestly after the ADP data. Considering the numbers were higher than expected, that may be more of a relief bid, or even "new month" trading (8:15am is the time of the release and 8:20am is CME open that frequently sees increased volume).All that having been said, ADP is no longer big business when it comes to market movement.
We were far more interested in the Treasury announcement, but it too has underwhelmed. Auction sizes remained unchanged in everything 10yrs and up. Increases were focused on the shortest end of the yield curve, which is what you'd probably want as a borrower if rates were really high but might be lower in a few years. (FRN = floating rate notes)
Treasury also announced the buyback program, or rather, announced that it would be starting the buybacks first announced back in 2023. At $2bln per week, it's not a huge addition to the bid side of the equation. Bonds have barely budged in response.
