Straightforward Gains After Important Inflation Data
While today's monthly core PCE headline may have technically been higher than the median forecast, a vast majority of forecasters abstained from submitting updated guesses to data aggregators after yesterday's quarterly PCE data. Had they been compelled to do so, the forecast would almost certainly have risen to 0.2 from 0.1 and today's unrounded number of 0.182 would be the logical beat that the market traded... logically. In fact, one might call the 2 day action "boring" considering this morning's quick PCE-driven rally almost perfectly offset yesterday's PCE-driven sell-off and neither was very big in the bigger picture.
Econ Data / Events
Core M/M PCE
0.2 vs 0.1 f'cast, 0.1 prev
(unrounded = 0.182%)
Core Y/Y PCE
2.6 vs 2.5 f'cast, 2.6 prev
Incomes
0.2 vs 0.4 f'cast, 0.4 prev
Outlays
0.3 vs 0.3 f'cast, 0.4 prev
Consumer Sentiment
66.4 vs 66.0 f'cast, 68.2 prev
Market Movement Recap
08:40 AM 10s are down 2.6bps at 4.218 and MBS are up 2 ticks (.06).
12:11 PM Mostly sideways after initial rally. MBS up 6 ticks (.19) and 10yr down 3.7bps at 4.207
02:28 PM Flat at same strong levels. MBS up 7 ticks (.22) and 10yr down 4.3bps at 4.201.
05:50 PM 10yr out the door down 4.7bps at 4.196 and MBS ended up just over a quarter point.
This week's most important economic data was the PCE price index which is the gold standard of big picture inflation measurement. For those hoping to see rates drop, it was important for PCE to confirm the progress seen in the CPI data (the other major inflation index that came out 2 weeks ago). Spoiler alert: PCE confirmed the progress, but there are a few nuances. Perhaps most importantly, this week's PCE data covers the same time frame as the CPI data two weeks ago. In other words, it's not quite as awesome as 2 consecutive months of "mission accomplished" levels of inflation (which has now arguably been cemented for June), but it's nonetheless an important milestone in the path toward rate cuts. What exactly does "mission accomplished" mean? This simply refers to Fed's 2% annual inflation target, typically tracked via Core PCE which excludes more volatile food and energy prices. In order to hit 2%, monthly inflation readings need to average roughly .17%. This time around, it was .182%--definitely in the historical range of on-target inflation from before the pandemic. While the chart above makes it look like victory has been achieved, the inflation target is technically an annual thing, so we need to see more months in the target zone before the year over year number falls into line. Even then, the Fed has clearly stated that the annual change doesn't need to hit 2% as long as they're confident that it will. Prior to this week's data, the average Fed member has expressed an increasing amount of said confidence. It's not thought to be enough for a rate cut at next week's Fed meeting, but it's widely believed to result in a September rate cut, as long as the data doesn't do anything crazy between now and then.
The only thing constant is change. After 53 years, Southwest Airlines is ending its 100 percent open seating policy! (I don’t mind lining up.) People and companies have to adjust… Time waits for no one. What were concerts like in 1964, 60 years ago? Here’s an interesting chart that shows where the U.S. Government pegged interest rates through history, including 1964. (In the 4’s.) While we’re on interest rates, many clamor for lower rates, whether that means 6 or 5 or 4 percent is unclear. There’s a lot of talk about the Federal Reserve’s Open Market Committee lowering the fed funds target rates in September when the Fed meets. But lenders know that an interest rate cut might not translate into immediately lower mortgage rates. Ask your capital markets staff: The bond market is already pricing in rate cuts, so the simple act of the Fed cutting is not necessarily going to have a direct impact on mortgage rates. (Today’s podcast is found here and this week’s is sponsored by LoanCare, known for delivering superior customer experience as a mortgage subservicer through personalization and convenience, and supporting MSR investors with a focus on customer engagement, liquidity, and credit risk. Hear an interview with NJ Lenders’ Steve Grossman on coaching his sales staff to get the best out of them.) Lender and Broker Software, Products, and Services Deephaven Mortgage is excited to announce that it is hosting its own non-QM event, Non-QM Power Pulse, along with Anchor Loans on September 18th 8:30 am to 12:30 pm in Hollywood Beach, Florida! Deephaven is committed to support, educate and deliver resources to the entire real estate community. Chief Sales Officer at Deephaven Tom Davis, Managing Director of National Accounts at Deephaven Tyler Bohn and VP of Business Development at Anchor Loans Dave Gray join other industry experts to deliver educational panels focused on helping you increase your volume. In one day, you will gain the power to: Stay ahead of the competition, increase your volume and referral base, network with top Realtors, investors, and loan originators! You will also learn how to promote Ground Up Construction and Fix and Flip programs to investors. Register now and join us so that you can offer a full suite of investor loans for your clients to build their portfolios and differentiate yourself in the market. Register Now!
After yesterday's quarter over quarter core PCE price index came in 0.2% higher than expected, we knew today's monthly PCE data would have to include higher numbers divided across the months of April, May, and June in some unknown proportion. If April and May were not revised, it suggested an unrounded monthly core PCE of 0.37 today, which would have rounded to a 0.4% headline versus the 0.1% forecast. But that would be very uncommon, so markets split the difference and figured the extra inflation would be spread more evenly across the quarter. Forecasters who updated their predictions changed to 0.2% for the m/m core number, and that's exactly what we got.
The more we drill down, the better the news gets. After all, 0.2 is a rounded number. The unrounded version was 0.182... even better! Perhaps just as important was the fact that the housing component of the PCE data fell to its lowest level since it was first on the way up in 2021.
The following heat map shows another way to visualize the progress:
The main takeaway is really the same in that it shows significant cooling in what has been the most problematic sector. It also serves to remind us that there are months like January that will continue to distort 6 month and 1 year metrics.
Bottom line to all this: the market knew the previous 0.1% forecast for today's core PCE was a long shot after yesterday. That's why we sold off yesterday instead of today. Now that today's PCE came out with what was probably the softest possible realization of yesterday's warning, bonds are breathing a small sigh of relief, moving to the stronger end of this week's range.
Lots of Competing Motivations Causing Volatility In a Narrow Range
Today marked an uptick in the importance of economic data for the week and it had obvious consequences for volatility. Of particular importance was the higher reading in quarterly PCE prices. Because this is the first look at Q2 data, it's one of 4 days each year where the PCE component of the GDP data offers a sneak peek at the full PCE report that comes out the following morning. the 2.9 vs 2.7 reading suggests there's extra inflation that will be distributed between April, May, and June. If June accounts for more than the other two months, tomorrow's PCE index will be higher than expected, and thus bad for rates. That accounts for some weakness this morning, but traders are also in the midst of adjusting their yield curve positioning which has resulted in big discrepancies between longer and shorter term rates this week.
Econ Data / Events
Jobless Claims
235k vs 238k f'cast, 245k prev
Durable Goods
-6.6 vs 0.3 f'cast, 0.1 prev
Nondefense ex-air Durable Goods
1.0 vs 0.2 f'cast, -0.9 prev
GDP
2.8 vs 2.7 f'cast
Core PCE Prices Q/Q
2.9 vs 2.7 f'cast
Market Movement Recap
08:56 AM Sharply stronger overnight but losing ground after data. MBS still up 7 ticks (.22) and 10yr still down 5+ bps at 4.24.
11:51 AM Decent amount of volatility in the AM hours. Slightly negative drift, but MBS still up 6 ticks (.19) and 10yr still down 6bps at 4.229
01:43 PM Generally weaker after the auction, with losses focused on the short end. MBS still up an eighth. 10yr still down 3bps, but near highs of day at 4.258
Watching Rates
Check our some recent articles and posts about current rates.
This week's most important economic data was the PCE price index which is the gold standard of big picture inflation measurement. For those hoping to see rates drop, it was important for PCE to confirm the progress seen in the CPI data (the other major inflation index that came out 2 weeks ago). Spoiler alert: PCE confirmed the progress, but there are a few nuances. Perhaps most importantly, this week's PCE data covers the same time frame as the CPI data two weeks ago. In other words, it's not quite as awesome as 2 consecutive months of "mission accomplished" levels of inflation (which has now arguably been cemented for June), but it's nonetheless an important milestone in the path toward rate cuts. What exactly does "mission accomplished" mean? This simply refers to Fed's 2% annual inflation target, typically tracked via Core PCE which excludes more volatile food and energy prices. In order to hit 2%, monthly inflation readings need to average roughly .17%. This time around, it was .182%--definitely in the historical range of on-target inflation from before the pandemic. While the chart above makes it look like victory has been achieved, the inflation target is technically an annual thing, so we need to see more months in the target zone before the year over year number falls into line. Even then, the Fed has clearly stated that the annual change doesn't need to hit 2% as long as they're confident that it will. Prior to this week's data, the average Fed member has expressed an increasing amount of said confidence. It's not thought to be enough for a rate cut at next week's Fed meeting, but it's widely believed to result in a September rate cut, as long as the data doesn't do anything crazy between now and then.
Mortgage rates continue moving in very small steps from day to day--something that's been the case since the Consumer Price Index (CPI) more than 2 weeks ago. Unfortunately, more of those steps have been higher in the past week, and today is no exception for most lenders. This is counterintuitive to those who closely follow bonds markets and who understand that mortgage rate movement closely matches those underlying market movements. Reason being: bonds are technically in stronger territory compared to yesterday. Strength in the bond market almost always coincides with lower mortgage rates, but the timing of that strength can cause some inconsistencies. For instance, bonds swooned yesterday afternoon and not every mortgage lender saw fit to raise rates in the middle of the business day in response. Those lenders consequently had to adjust for both yesterday's weakness and today's strength in their latest rate offerings. Lenders who issued late day reprices yesterday were able to hold steady this morning or even offer slightly lower rates today. If all of that is a bit confusing, just consider that, despite several ups and downs over the past 48 hours, bonds are in weaker territory than they were yesterday morning during the time when lenders publish rate sheets. Lenders either took their lumps yesterday afternoon or this morning. As for motivations, the market is rapidly adjusting its preferences for different durations of bonds. In other words, 2yr Treasury notes gained a ton of popularity over the past few days and even more since late June. This is mostly a factor of the shift in the outlook for the Fed Funds Rate. When traders make these adjustments, it can impact the bonds that more readily translate to mortgage rates.
Mortgage rates technically moved up to the highest levels in 2 weeks today, but that sounds a bit more dramatic than it actually is. Rates have largely held inside a narrow range close to the lowest levels in 6 months during that time. Today's weakness in the bond market just happened to nudge the average mortgage lender slightly above the highs seen this past Monday and Friday. The average borrower wouldn't see much of a difference between those rates and today's. As for the underlying motivation for the movement, it doesn't merit much discussion or investigation. After all, we just made the case that recent movements are all just different flavors of "flat." Still, we like to get to the bottom of things every day, even when some days are more important than others. In not so many words, the broader bond market is in the process of adjusting to a new reality in which the Fed begins to cut the Fed Funds Rate. Ironically, there are times when this will mean that longer term rates like 10yr Treasury yields and mortgage rates will move higher at the same time that shorter term rates (like 2yr Treasuries) are moving lower. This was a factor today as 2yr Treasuries improved more than twice as much as 10yr Treasuries deteriorated. The coming days are more likely to see bonds/rates reconnect with economic data as a primary motivation. There are several important reports on Thursday and Friday morning, but the data's significance will kick into even higher gear in the following two weeks.
Spats of volatility in the mortgage rate world seem to last only a matter of hours recently and to occur only a few times on any given month. The rest of the time is spent drifting mostly sideways waiting for the next big shoe to drop. We've been decisively locked in one of those "drifting" moments for almost 2 weeks now with the last big move seen in response to the inflation data that came out on the morning of June 11th. The average top tier 30yr fixed rate has been in the 6.8s ever since. Today's change was minimal with many lenders effectively unchanged compared to yesterday morning's offerings. Some lenders made adjustments toward higher rates yesterday afternoon in response to market weakness, and are now back down in line with averages. When will the sideways drift change? Volatility has most reliably followed one of several of the most important economic reports. None of those reports are coming out this week, but there are a few solid supporting actors that will begin hitting the wires tomorrow morning (specifically, S&P Global's manufacturing and service sector indices). This won't singlehandedly change the outlook for rates, but it may cause slightly bigger movement between now and the first two weeks of August, when the big ticket data actually arrives.
