Mortgage rates ended last week very close to their lowest levels in more than 2 months after Fed Chair Powell essentially confirmed next week's rate hike would be smaller than the last. This wasn't necessarily new news based on speeches from many other members of the Fed, but markets were more willing to react to Powell himself. Friday's stronger jobs report temporarily pushed rates back in the other direction. A strong labor market emboldens the Fed to be less friendly on rates without as much concern for collateral damage in the economy. Even then, traders pushed bonds back to better levels by the end of the day ("better levels" in bonds = lower rates, all other things being equal). The new week is starting off on a weaker note, however. China eased some of its covid restrictions, which had previously supported risk-aversion in financial markets. One byproduct of general risk aversion is downward pressure on rates. The bigger story was a shift in the overall outlook on the upcoming Fed meeting. Whereas last week was marked by optimism for the smaller rate hikes, Monday saw traders making adjustments to the longer-term rate hike outlook. In other words, the smaller rate hike next week is understood, but traders are worried about how many additional rate hikes the Fed will convey in its forecasts. These forecasts are only released 4 times a year, so it can add quite a bit of volatility to the market's reaction to the Fed on those 4 occasions. After all, a lot has changed since September 21st.
Black Knight released its Mortgage Monitor report today--always a treasure trove of robust housing/mortgage-related data. Of particular interest this time around is the ongoing price declines seen in Black Knight's Home Price Index (HPI)--especially as they relate to the recent FHFA HPI data that influenced new conforming loan limits. To be clear, today's HPI from Black Knight is for October whereas last week's FHFA HPI data was for September. It's nonetheless interesting because the sort of full-fledged price rebound seen in the FHFA data (Q3 miraculously came in slightly HIGHER than Q2) is nowhere to be found in any of the other data. NOTE: FHFA's own monthly HPI data suggested declining values in Q3 but the conforming loan limit is based on expanded quarterly data which includes more lower priced homes which would indeed be less likely to show the same level of price declines as higher value homes. Disclaimers aside, the notion of higher prices in Q3 vs Q2 doesn't jive with any of the other data. The point of comparing Black Knight's latest data to FHFA is simply to illustrate the mystery can't simply be chalked up to timing. That said, the Black Knight data agrees that price declines have begun to slow. In the month of October, the HPI fell 0.43%, but in seasonally adjusted terms, the decline was only 0.13%. That makes October the best month since prices began declining in July. This took the annual appreciation rate down to 9.3% (still exceptionally high) from 10.6% in September.
Weaker Start on Data and Fed Anxiety
Bonds got off to a weaker start in the new week on a variety of factors. Over the weekend, a few Fed pundits shared more hawkish outlooks, including the WSJ, which pointed out that a 50bp Fed hike could be offset by the higher terminal rate in the dots. Markets already heard the Fed say the same, but in the absence of other news, maybe it mattered. Or maybe the easing of China's covid restrictions was the bigger story adding slight pressure to bonds heading into the domestic session. Either way, it was stronger ISM data that did the most damage, touching off a selling spree that took MBS roughly 3/4ths of a point lower and 10yr yields more than 11bps higher by the 3pm CME close.
Econ Data / Events
ISM Non Manufacturing
56.5 vs 53.3 f'cast, 54.4 prev
ISM Prices Paid
70.0 vs 70.74 prev
Market Movement Recap
08:47 AM Slightly weaker to start the overnight session and mostly flat since then. 10yr up 5.5 bps at 3.546. MBS down a quarter point.
09:40 AM Losing a bit more ground after a few corporate bond announcements. MBS down 3/8ths and 10yr up 6.6bps at 3.557.
10:03 AM Additional weakness after stronger ISM data. 10yr up 9.9bps at 3.59. MBS down over half a point.
01:39 PM Sideways to slightly weaker since ISM data. MBS down almost 3/4ths. 10yr up just over 10bps at 3.594.
03:18 PM 10yr in line with weakest levels at 3pm CME close, up 11.7bps at 3.608. MBS still down 3/4ths of a point.
The importance of the Consumer Price Index (CPI) cannot be overstated for most of 2022. That's doubly true in November and December. The Nov 10th iteration rocked the market (in a good way). The Dec 13th iteration has the power to confirm or refute November's takeaway, and it's now only 8 calendar days away. If it feels like everything since Nov 10th has been a waiting game for Dec 13th, that's a fair conclusion.
It's not that other data hasn't mattered or that it won't continue to matter, but it will end up looking like mostly sideways noise in the bigger picture while next week's CPI (and Fed day the day after) will set the tone in the bigger picture. Between now and then we're range watching with last week's low yields representing the latest floor as the new week pushed back in a less friendly direction.
Those low yields--basically 3.50% in the 10yr--align perfectly with the high volume sell-off back in June. It was also the scene of a high volume break out during the late September Fed week and it clearly serves as a major technical and psychological barrier blocking new progress for any aspiring rate rally.
3.68 is the nearest overhead level of consequence. It served as the lower end of the most recent post-CPI range and would be the more critical line of defense if the shorter-term technical ceiling at 3.62 is broken.
Apart from the ISM data that's already out, this week's economic reports are mostly on the B team. Producer Prices on Friday might be a slight exception because, unlike last month, it's coming out before CPI (both for the month of November). Even so, big market movement potential would require the core month over month level to fall quite far from forecast. Otherwise, traders will easily prefer to wait the 2 business days for CPI.
“Hey Chet, since you’re the new guy here with the park U.S. Geological Survey in Hawai’i, you’re going to be the one placing the live cam on the volcano for our YouTube feed. Splendid! We’ll be behind you all the way.” (Apply to mortgage banking however you see fit.) Scooting back to lending, I am occasionally asked about high balance conforming conventional loans, and why so much of the country doesn’t care about them (to be somewhat blunt). The MBA put out a fine map showing “high-cost areas” defined by the FHFA as “areas in which 115 percent of the local median home value exceeds the baseline conforming loan limit.” The loan limits are permitted to be higher than the baseline loan limit until a ceiling of 150 percent of the baseline limit is reached. That said, remember that 20-25 percent of the nation’s home loans come from California. (Today's podcast is brought to you by SimpleNexus, an nCino company and award-winning developer of mobile-first technology for the modern mortgage lender, and today’s features and interview with Candor’s Sara Knochel on creating the first Loan Quality Services (LQS) underwriting engine, increasing efficiencies for mortgage lenders in a tight market.) Lender and Broker Software and Services Recently, a Massachusetts woman was accused of assaulting officers with a swarm of angry bees, Exhibit A, in an ill-advised “hive-jacking” of collective strength. On the other hand, mortgage lenders are focusing on putting their real estate agent network to far better use to increase referral pipelines. Fortunately, SimpleNexus, an nCino Company, helps lenders like Genesee Regional Bank (GRB) connect with more partners to execute productive referral strategies. Through a sharable mobile app, real estate agents can run payment calculations, integrate home search listings, generate self-serve pre-qual letters, and receive push notifications when borrowers complete loan milestones. Download the free case study to learn more about GRB’s experience with SimpleNexus, including its processing, operations, and post-closing efficiencies.
Bonds Ultimately Shrug Off Stronger Jobs Data
Today saw a fairly impressive round trip for rates following the stronger-than-expected jobs report. The initial reaction was clear and unsurprising. NFP (and especially wages... recently mentioned by Powell) came out higher and rates immediately jumped. Stocks also tanked on the news because both sides of the market were trading the Fed outlook. After the initial convulsion, bonds gathered their composure and began the long slog back to unchanged levels by the 3pm CME close. Today's video discusses a few ways to rationalize that, but ultimately, we would not feel the need to rationalize anything if bonds had ended slightly weaker.
Econ Data / Events
263k vs 200k f'cast, 284k prev
0.6 vs 0.3 f'cast, 0.5 prev
3.7 vs 3.7 f'cast/prev
Market Movement Recap
08:53 AM Sharply weaker after the NFP with a bit of a bounce now. 10yr still up 6.7bps at 3.576. MBS down roughly 5/8ths of a point.
12:31 PM Decent recovery into the PM hours. MBS down less than 3/8ths now which is roughly a half point above the AM lows. 10yr yields up only 5bps at 3.56 after being as high as 3.64 earlier.
02:34 PM Almost all the way back to unchanged levels now, both in Treasuries and MBS. 10yr up only 1bp on the day at 3.521. MBS down only 3 ticks (.09).
04:10 PM All the way back into positive territory and then some, albeit after hours at this point. 10yr down 2.8bps at 3.482. MBS up just over an eighth of a point.
As far as financial markets are concerned, a green Christmas is better than anything Bing Crosby could have crooned about. Green is the color that flashes when markets are improving or when interest rates are falling. Green, for lack of a better word, is good. For mortgage rates, it's been an especially difficult year. They've risen at the fastest pace in 40 years to levels not seen for 20 years. They've gotten their hopes up a few times only to have them crushed more and more convincingly. Despite being downtrodden, market participants knew that the bad times couldn't last forever. The higher rates went, the closer they were to the peak--even if that peak ended up being quite a bit higher than most anyone imagined earlier in the year. To understand why rates went as high as they did and why there's renewed hope for a reversal, we need to remember that inflation has been the driving force. Every time inflation surprised to the upside, rates ratcheted abruptly higher. Most recently though, inflation surprised to the downside when the most recent Consumer Price Index (CPI) data came out on November 10th. The result was the single best day for mortgage rates on record (in terms of day-over-day movement). This isn't the first time for such a surprise, but it's the most compelling. It sets the stage for the next CPI report to confirm a big picture shift in the inflation narrative.
Change has been in the air since the November 10th CPI data. That single report did more than any other event to raise hopes for a big picture shift in 2022's rate narrative. Then 2 days ago, Fed Chair Powell confirmed the thoughts shared by other Fed speakers in the past few weeks. Specifically, the Fed is now at the point of slowing the pace of rate hikes and settling on a "terminal" (aka "ceiling") Fed Funds Rate--one that it will attempt to hold as long as possible. In order for the shifty narrative to play out, not only does inflation need to continue to moderate, but the labor market also needs to avoid sending stronger signals. Unfortunately for bonds, today's signals were anything but weak.
True to form, both sides of the market stuck to the familiar trading pattern that merely asks "what's this data mean for Fed policy?" We've referred to this in the past as the "Fed accommodation trade," but labels aren't important. The function is quite clear: stronger jobs data is bad for both stocks and bonds--at least as far as the initial reaction to the headlines are concerned.
How can we be sure of the implications for Fed policy? There's no way to unequivocally confirm it, but the market securities concerned with betting on the path of the Fed Funds Rate sure seem to be convinced.
And let's not forget Powell's comment from Wednesday:
FED'S POWELL: INITIAL SURGE OF INFLATION NOT RELATED TO WAGES, BUT WAGES ARE GOING TO BE IMPORTANT GOING FORWARD
along with the fact that wage growth came in at 0.6 vs 0.3 this morning and was revised up another 0.1 for last month.
Finally, let's not forget that today's weakness is a drop in the bucket in the big picture. In fact, it's downright hard to see the 4 pixels of red line representing today's selling in the following chart:
Robert K. writes, “My Mom always said, ‘Work until your bank account looks like a phone number. Well, I did it! ‘Available balance: $911.’” Speaking of numbers, thank you to those who wrote to me correcting the GDP of Mexico here as being $1.4 trillion and not $1.4 billion. Numbers certainly tell the story with vendors and lenders. Owners of vendors and third-party providers are looking at middle layers of management, cutting back, certainly cutting salaries, or ridding themselves of unproductive salespeople. Lenders continue to cut staff (Wells Fargo being the latest example) or furlough employees for a portion of their workweeks and implementing salary cuts. Meanwhile, managers report that end-of-year reviews are resulting in employees asking for raises due to inflation. On a lager scale, uh, larger scale, mergers and acquisitions continue. The latest to cross the tape is that "Guild Mortgage is excited to announce the acquisition of Inlanta." (STRATMOR acted as the advisor.) (Today’s podcast is available here and this week’s is sponsored by Candor Technology: Home of the One Touch Underwrite, supporting lenders from Point of Sale to Post Close QC, to reduce repurchase risk, increase underwriter productivity by 400 percent, and decrease turn-times by 10.) Lender and Broker Software and Services “How is your profitability by loan officer? How is your profitability by branch? By region? If you want the answers to these questions, Richey May’s RM Analyze business intelligence can give you that visibility. Our platform is designed and implemented by mortgage industry experts to quickly set you up with the critical reports you need to run your business. We understand that having visibility into your profitability at all levels enables you to make powerful decisions that help your business succeed. If you don’t have the data at your fingertips that tells you how you’re performing in real time, you may not be able to act quickly enough in this fluid market. It’s time for you to get a deeper look at your business. Contact the RM Analyze experts to learn more.”
Mortgage rates had been in a holding pattern for nearly 3 weeks following the November 10th CPI inflation data. On that single day, the average 30yr fixed rate fell by a record amount (as far as day-over-day record keeping is concerned, and we don't have daily records prior to 2009). That took rates from the low 7s to the mid 6's in a matter of hours and there they've stayed until this morning. The timing of today's improvement depends on the lender in question to some extent. Several lenders offered fairly aggressive improvements yesterday. This was in response to a well-received speech from Fed Chair Powell and stronger than expected bond buying as a part of the month-end trading process (bond buying is good for rates, all other things being equal). Those friendly events happened late enough in the day that the average lender wasn't able to adjust their rates accordingly until this morning. All that needed to happen was for the bond market to hold relatively steady overnight. It did. The result is easily the best day of improvement since November 10th, and one of the better days of 2022. The average borrower would be seeing rates that are 0.25% lower versus yesterday morning at the average lender (i.e. 6.5% is now 6.25%). Friday brings the important Employment Situation (the official jobs report from the Department of Labor). The Fed is primarily focused on inflation, but labor market data is a not-too-distant second. If job creation comes in weaker--especially if wage growth decreases--the Fed will increasingly conclude it has less room to be aggressive in its fight against inflation without doing serious damage to the economy. All other things being equal, that would make for another good day for rates.