Powell Rains on Bond Market's Mini Parade
Today is a bit of a mirror image compared to yesterday. Bonds lost ground after the AM econ data and then began improving heading into the afternoon hours. Despite the gains, the yield curve suggested some apprehension ahead of Powell's speech/Q&A in Dallas this afternoon. Fears proved to be justified as Powell echoed colleague's recent quips regarding a slower pace of rate cuts than previously foreseen. This isn't a surprise considering the recent econ data, but confirmation was worth a bit more selling of shorter-dated Treasuries. MBS got swept up in that trade and ended up trading a 7 tick (.22) gain for a 6 tick (.19) loss as of 4pm ET. Fairly uneventful in the bigger picture.
Econ Data / Events
Jobless Claims
217k vs 223k f'cast, 221k prev
Continued Claims
1.873k vs 1.888k f'cast, 1.892k prev
Core PPI M/M
0.3 vs 0.3 f'cast, 0.2 prev
Core PPI Y/Y
3.1 vs 3.0 f'cast, 2.8 prev
Market Movement Recap
08:37 AM Slightly stronger overnight. Weaker after data. MBS down just over an eighth and 10yr up 1.8bps at 4.482
09:43 AM Back into positive territory. 10yr down 4.9bps at 4.415 and MBS up an eighth of a point.
02:48 PM Off the best levels with most of the selling in the short end of the curve. MBS still up 2 ticks (.06) on the day but down 6 ticks (.19) from the highs. 10yr yields down 5bps at 4.415
03:12 PM Additional losses after Powell speech. MBS down 3 ticks (.09) and 10yr down 1.7bps at 4.446
Losses... weakness... selling pressure... When any of these things happen in the bond market, it puts upward pressure on interest rates. Mortgage rates are primarily determined by bonds, after all. Today started out well enough for the bond market. This allowed mortgage lenders to set today's rates roughly in line with yesterday's levels. That makes for 3 days in a row with the average lender offering top tier 30yr fixed rates just a hair above 7%. Fed Chair Powell have a speech and answered questions today at a regional event in Dallas. He echoed recent comments from other Fed speakers regarding the pace of Fed rate cuts. In short, Fed sentiment is shifting in favor of slower pace. As we hopefully learned from the market movement heading into (and out of) the Fed's September meeting, expectations for Fed rate cuts have an immediate impact on longer term rates like mortgages. Days like today contribute to cooler expectations for rate cuts and thus put upward pressure on rates. That's not immediately apparent in mortgage rates, but this had more to do with the timing of bond market movement today. Fortunately, bonds had gained some ground before they lost ground. The net effect is not big enough for most mortgage lenders to raise rates.
Demographics matter. Although I am sending today’s Commentary out from a Dunkin’ near Columbus, Ohio, yesterday I found myself visiting a supposedly haunted hotel in Chattanooga, possibly the last “weather kiosk” in the world in Knoxville, a tourist attraction near Lexington built like an ark, and in a tavern, for lack of a better term, in Kentucky, and a fellow at the bar struck up a conversation with me. He explained that his family had moved from Wisconsin to Florida, found it intolerable, and was now thinking about living near Lexington. Per Prashant Gopal of Bloomberg, lots of investors snapped up land in Kissimmee, Florida, the suburb of Orlando, with the goal of making an easy buck renting them out to tourists trying to visit Disney. The suburb has over 30,000 short-term rentals, more than any other city in America, so lots of supply and not as much demand. The solution? Hire Home Theme Orlando, which will renovate the houses at a starting price of $150,000 a pop to make them “themed.” The ”theme” of this week in Mar Largo has been proposed appointments, and eventual changes in Washington DC. And today is another episode of The Big Picture at 3PM ET (click here to register). Today’s show has Mark Calabria (he was the Director of the Federal Housing Finance Agency – FHFA – and chief economist for VP Pence) discussing the possible future of Freddie & Fannie. (Today’s podcast can be found here. This week’s is sponsored by Floify. Floify is an easy-to-configure point-of-sale platform that allows each branch or loan officer to customize its look and feel to meet the needs of their lending team, homebuyers, and market. Today’s features an interview with CMG Financial’s AJ George on the strategy of mergers and acquisitions from an executive’s perspective.)
The morning has been both straightforward and interesting. The straightforward part involved a moderate sell-off following stronger economic data. Jobless claims fell (both weekly initial claims and continued claims), and core PPI came in 0.1 higher than expected in year over year terms. A saving grace on the inflation front was the as-expected result in monthly core PPI (0.3 vs 0.3) and the fact that it was almost lower than expected (unrounded number was 0.253, which is about as low as it could be without rounding down to 0.2). The interesting part of the morning has been a quick return to positive territory. The gains are not data-driven and the only objective justification would be a series of big block trades in 5 and 10yr notes that came in right as yields were peaking.
While there's been plenty of movement in the average mortgage rate on any given day recently, today was not one of them. 30yr fixed rates remained above 7%, but technically fell 0.01% (an amount so small that it may as well be considered an absence of change). Despite the flat day-over-day result, there continues to be much more intraday movement than normal. Mortgage lenders publish an initial rate in the morning and it only changes if the bond market moves enough in one direction or the other. Over the decades, on any given day, the average lender is more likely to keep the same rate offerings all day. Recently, however, that's the exception. Most lenders have faced multiple situations that have forced a mid-day reprice on any given week. The past two days haven't been as volatile in that regard, but many lenders ended up pushing rates a bit higher after starting the day in lower territory. If there was a reason that rates were able to hold ground today, it was the bond market's favorable reception to this morning's Consumer Price Index (CPI), a key inflation report that showed a modest improvement versus last month. Some market watchers were concerned that inflation would continue to trend higher--something that would push rates higher, all other things being equal.
Watching Rates
Check our some recent articles and posts about current rates.
Losses... weakness... selling pressure... When any of these things happen in the bond market, it puts upward pressure on interest rates. Mortgage rates are primarily determined by bonds, after all. Today started out well enough for the bond market. This allowed mortgage lenders to set today's rates roughly in line with yesterday's levels. That makes for 3 days in a row with the average lender offering top tier 30yr fixed rates just a hair above 7%. Fed Chair Powell have a speech and answered questions today at a regional event in Dallas. He echoed recent comments from other Fed speakers regarding the pace of Fed rate cuts. In short, Fed sentiment is shifting in favor of slower pace. As we hopefully learned from the market movement heading into (and out of) the Fed's September meeting, expectations for Fed rate cuts have an immediate impact on longer term rates like mortgages. Days like today contribute to cooler expectations for rate cuts and thus put upward pressure on rates. That's not immediately apparent in mortgage rates, but this had more to do with the timing of bond market movement today. Fortunately, bonds had gained some ground before they lost ground. The net effect is not big enough for most mortgage lenders to raise rates.
While there's been plenty of movement in the average mortgage rate on any given day recently, today was not one of them. 30yr fixed rates remained above 7%, but technically fell 0.01% (an amount so small that it may as well be considered an absence of change). Despite the flat day-over-day result, there continues to be much more intraday movement than normal. Mortgage lenders publish an initial rate in the morning and it only changes if the bond market moves enough in one direction or the other. Over the decades, on any given day, the average lender is more likely to keep the same rate offerings all day. Recently, however, that's the exception. Most lenders have faced multiple situations that have forced a mid-day reprice on any given week. The past two days haven't been as volatile in that regard, but many lenders ended up pushing rates a bit higher after starting the day in lower territory. If there was a reason that rates were able to hold ground today, it was the bond market's favorable reception to this morning's Consumer Price Index (CPI), a key inflation report that showed a modest improvement versus last month. Some market watchers were concerned that inflation would continue to trend higher--something that would push rates higher, all other things being equal.
Last Thursday and Friday offered some hope that the persistent move to higher rates was finally leveling off. It wasn't necessarily a rational hope, but if nothing else, it was "nice" to see the average 30yr fixed move back below 7%. Even then, we cautioned against viewing the recovery as indicative of ongoing success. Now today, we see why. Bonds (which dictate rates) have moved swiftly back into the weaker territory that precipitated the move over 7% in mortgage rates. As such, it's no surprise to see the average lender easily back into the 7s. For context, rates were as high as 7.5% in April and 8.0% at their long-term peak roughly a year ago. As for motivations, the market continues to work through election-related volatility. That involves a complex set of considerations. Some of them have to do with actual expectations for changes in fiscal policy in the coming years. Some of the considerations are as simple as traders going through the process of exiting (and re-setting) trading positions heading into the election. Motivations aside, it continues to be the case that interest rates would need to see significant weakness in economic data and a stronger move toward lower inflation in order for any real progress. Tomorrow morning brings the first of the week's big data points in the form of the Consumer Price Index (CPI)--an inflation report with a solid track record of inspiring reactions in rates.
The bond market dictates day to day movement for all manner of interest rates, including mortgages. On election night, bond yields (another word for "rates") spiked as soon as traders felt the results were evident. The following morning, mortgage-backed bonds started out much weaker and mortgage rates were at the highest level in months. Fast forward two days and mortgage rates are back below 7% and at the lowest levels since October 25th. While that's not an exceptional leap into the past, it's certainly better than a continued move to infinity and beyond. What gives?! In not so many words, not much. The bond market had rushed to get into position for the election, and the reaction to election night itself ended up being a mere formality that was quickly erased--a testament to how accurately the market predicted where it would have wanted to be WELL in advance. Today's rate improvement wasn't as much a factor of bond market gains as it was mortgage lenders getting caught up to the gains from yesterday. Lenders have been understandably cautious given the big swings in bonds and the prospect for additional volatility. At times like this, it's not uncommon for lenders to wait a bit longer than normal to be sure bond market improvement is sustained before adjusting mortgage rates. As nice as this recovery is, it shouldn't be viewed as indicative of ongoing success. Rates continue to face headwinds that will only truly be defeated by weaker economic data and lower inflation. To that end, economic reports will continue playing an important role. Next week's headliners include the Consumer Price Index (CPI) and Retail Sales on Wednesday and Friday respectively. Monday is closed for Veterans Day.