“Someone posted that they had just made synonym buns. I replied, ‘You mean just like the ones that grammar used to make?’ I am now blocked.” That was sent to me by an economist; yes, they have senses of humor. Did you know that the Federal Reserve Board employs more than 500 researchers, including more than 400 Ph.D. economists, who represent an exceptionally diverse range of interests and specific areas of expertise? (I wonder if anyone yells, “Is there a doctor in the house?” at staff meetings.) This week’s focus will be almost entirely on the Federal Reserve. The central bank's monetary policy committee will deliver its seventh interest rate decision of the year on Wednesday. The Fed has stubbornly held interest rates steady since ending 2024 with a series of cuts, but now with the labor market showing continued signs of cooling and inflation remaining sticky, it is a sure thing that the central bank will restart its policy easing process and drop overnight Fed Funds by 25 basis points, which in turn should move the discount rate lower (the rate at which the Federal Reserve lends money to financial institutions, including commercial banks, thrifts and credit unions). (Today’s podcast can be found here and this week’s are sponsored by CreditXpert. The all-new credit optimization platform that helps you close more loans. CreditXpert is committed to making homeownership more accessible and affordable for ALL. Today’s features an interview with Potomac Consulting’s Dan Varroney on why the Federal Reserve should cut rates 50-basis points this week due to weakening labor markets and recent inflation data.)
For all the time we spend pushing back on the notion that the Fed Funds Rate is a root cause for volatility in longer-term rates, that push-back always carries a notable caveat: Fed Funds Rate expectations definitely have a direct correlation with longer-term rates.
There are two reasons those expectations can change: markets are either assuming the change due to economic data or markets are reacting to a change in the Fed's reaction function. Fed speeches and especially the quarterly dot plot (a summary of each Fed member's base case rate expectations) account for changes in the reaction function.
This is why the dot plot can be such a big market mover. It also causes volatility because the market spends 3 months trying to get inside the Fed's head and the dots let the market know how good of a job they did.
Bottom line: with a fairly big shift in labor market metrics over the past 3 months, Wednesday afternoon's dot plot is this week's focal point for potential volatility.
Bonds are starting the week slightly stronger after holding fairly steady in the overnight session.
Incidental, Inconsequential Weakness Ahead of Fed Week
Bonds began the day in modestly weaker territory and yields are heading out right where they started. In fact, yields are also right in line with the opening levels from Monday. This broadly suggests the market got where it was going after the jobs report and is now waiting for the next big shoe to drop. The other way to view this entire week is as an opportunity to book profits and cover shorts on the recent "steepening" trade (which favored buying 2s over 10s). Indeed, 2yr yields mostly sold off this week relative to 10s and today was the only real exception. Either way, there was no concrete cause and effect in the news or econ calendar, so chalk it up to "position squaring ahead of next week's Fed day."
Econ Data / Events
Consumer Sentiment
55.4 vs 58.0 f'cast, 58.2 prev
1yr inflation expectations
unchanged
5yr inflation expectations
3.9 vs 3.5 previously
Market Movement Recap
10:41 AM moderately weaker overnight and holding mostly sideways so far. MBS roughly unchanged and 10yr up 3.8bps at 4.063
02:18 PM Holding sideways all day. MBS up 1 tick (.03) and 10yr up 3.9bps at 4.065
03:41 PM Heading out with 10s up 3.3bps at 4.059 and MBS still up 1 tick (.03).
The underlying bond market (which dictates the rates offered by mortgage lenders) weakened moderately overnight. Weaker bonds equate to higher rates, all else equal. "Higher rates" is contrary to many media outlets' coverage this week, but there's an important reason. Most news organizations that cover mortgage rates rely on Freddie Mac's weekly rate survey for their once-a-week update. Additionally, when Freddie's rate raises/falls appreciably, it receives even more attention. This frequently creates problems due to the timing and methodology of Freddie's survey. Specifically, the survey is an AVERAGE of the rates seen over the 5 days (Thu-Wed) leading up to Freddie's Thursday release. As such, if rates happen to fall sharply on a Friday (as was the case last week), our DAILY rate tracking will reflect that on Friday while Freddie won't catch up until the following Thursday (yesterday, in this case). By that time, rates hadn't moved any lower, and now today, they're actually a bit higher. All that to say, the rate drop you're hearing about from Freddie is the same rate drop we told you about last Friday. There's been no meaningful improvement since then, and in fact, a modest increase in rates today. Today's move in bonds/rates wasn't driven by anything specific and shifts of this size don't demand concrete justification in underlying data or events. It could simply be the case that traders were closing out trading positions for the week and the modest uptick in yields/rates was the incidental result.
“Rob, we’ve said ‘no’ to more expansion possibilities than ever before. Are you hearing other lenders doing deep dives on LOs and branches and also not seeing a profitable path?” Yes indeedy. Here in Jackson, MS, at the Mississippi Mortgage Banker’s Fall Conference, lenders are not only discussing expansion but also early payoff penalties and strategies to avoid them. (Of course, they are explaining to newer entrants why few investors would ever pay 102 or 104 for a loan that may pay off soon at 100.) One topic is why companies service, or sell service, and this month’s STRATMOR piece is titled, “Servicing: What’s All the Fuss About?” Another topic on lenders’ minds are demographics, income, and reasons for moving, and now we have government news that income inequality has dipped and fewer people moved, per the largest survey of U.S. life. Talk to any solid loan originator, and they’ll tell you that the top three attributes of their brethren are focus, leadership, and consistency. (Today’s podcast can be found here and this week’s are sponsored by Indecomm. Streamlining operations with the genius blend of automation, AI, and services. Achieve practical digital transformation and real operational impact with Indecomm’s purpose-built mortgage solutions. Hear an interview with Polunsky Beitel Green’s Peter Idziak on takeaways from the bipartisan Home Buyers Privacy Protection Act (trigger leads bill), which amends the Fair Credit Reporting Act by shifting trigger leads to an opt-in system, mandates a study on text-based solicitations, and raises concerns about its impact on credit bureau revenue and market competition.)
Watching Rates
Check our some recent articles and posts about current rates.
The underlying bond market (which dictates the rates offered by mortgage lenders) weakened moderately overnight. Weaker bonds equate to higher rates, all else equal. "Higher rates" is contrary to many media outlets' coverage this week, but there's an important reason. Most news organizations that cover mortgage rates rely on Freddie Mac's weekly rate survey for their once-a-week update. Additionally, when Freddie's rate raises/falls appreciably, it receives even more attention. This frequently creates problems due to the timing and methodology of Freddie's survey. Specifically, the survey is an AVERAGE of the rates seen over the 5 days (Thu-Wed) leading up to Freddie's Thursday release. As such, if rates happen to fall sharply on a Friday (as was the case last week), our DAILY rate tracking will reflect that on Friday while Freddie won't catch up until the following Thursday (yesterday, in this case). By that time, rates hadn't moved any lower, and now today, they're actually a bit higher. All that to say, the rate drop you're hearing about from Freddie is the same rate drop we told you about last Friday. There's been no meaningful improvement since then, and in fact, a modest increase in rates today. Today's move in bonds/rates wasn't driven by anything specific and shifts of this size don't demand concrete justification in underlying data or events. It could simply be the case that traders were closing out trading positions for the week and the modest uptick in yields/rates was the incidental result.
Today's inflation report (the Consumer Price Index or CPI) certainly had a chance to create volatility for rates, but things ended up staying fairly calm. There are multiple subheadings of data that the bond market cares about when it come to CPI. Most of them were in line with expectations, or close enough to avoid surprising investors. The absence of surprise gave way to some improvement in bonds which, in turn, allowed mortgage lenders to start the day at just slightly lower levels. Additionally, a higher reading in this morning's weekly jobless claims report may have helped. Officially, the top tier 30yr fixed rate at the average lender just barely scratched out a new 11-month low, but most borrowers would see little--if any--difference compared to the past 4 days.
Wednesday brought the first of this week's two key inflation reports. While the Producer Price Index (PPI) is the lesser of the two in terms of potential impact on rates, it came in far enough below expectations to make for a measurable improvement. The catch is that the improvement in question pertains to the underlying bond market. Before the data, bonds were slightly weaker, thus suggesting slightly higher rates. But lenders don't release their rates for the day until a few hours of trading have commenced. This leaves time for markets to react to early AM data such as today's PPI. Bottom line, PPI helped bonds which, in turn, helped rates hold steady as opposed to drift a bit higher.
It had to happen at some point. After spending 4 straight days of setting new 11-month lows, mortgage rates finally moved higher today, but the headline is much scarier than reality. In fact, many borrowers won't see any detectable difference from yesterday's latest levels as the average lender's top tier 30yr fixed rates moved a mere 0.01% higher. This preserves the entirety of the improvement seen last Friday when rates dropped sharply in response to the downbeat jobs report. There haven't been major economic reports so far this week (the bonds that underly mortgage rate movement tend to react when important economic reports come in much higher or lower than expected). That changes over the next 2 days. Both Wednesday and Thursday bring important inflation updates via the producer and consumer price indices, respectively. Of the two, Thursday's Consumer Price Index (CPI) is the bigger potential source of volatility. Taken together, they will help flesh out the inflation considerations that will help the Fed hone in on a pace for the rate cuts that are expected to start in 2 weeks. [thirtyyearmortgagerates]
