The big monthly jobs report from the Labor Department (officially "The Employment Situation) is one of the most reliable sources of volatility for interest rates. While this was much easier to observe before the pandemic, key economic reports have been getting more and more attention as the market looks for evidence that inflation and tighter Fed policy are taking a toll on the economy. A weaker economy creates less demand for goods and services. This serves two purposes for interest rates.
Lower economic growth increases the appeal of safer haven investments like bonds. Excess bond buying demand pushes rates lower.
Lower demand can help prices fall, thus helping to cool inflation. Inflation is an enemy of low rates, and a key reason for the tighter Fed policy that's keeping upward pressure on rates. So if inflation subsides, rates would move lower, all other things being equal.
All that to say: what's bad for the economy is usually good for rates. Several recent reports have indeed shown clear signs of economic contraction. This is a key reason that rates hit new long-term lows last week. But this is a new week, and the two biggest economic reports were anything but weak. Swinging for the fences . On a week where many sports fans thought fondly of the late Vin Scully's famous "high fly ball into right field" call during the 1988 World Series, two of the heaviest hitting economic reports were also swinging for the fences.
Strong Data Redefining The Rate Outlook
Between Wednesday's ISM Services data and Friday's jobs report, the market was faced with two compelling "yeah buts" to what has generally been a symphony of economic bearishness over the past few weeks. Whereas inflation reports in June and July ultimately didn't ultimately didn't extend the market's perceived timeframe for the Fed's first rate cut in 2023 (i.e. June Fed Funds Futures were back to late May levels by the start of this week) the strong data abruptly changed that. After today, there's little if any rate cut probability priced into 2023's outlook. That will change, but until it does, it's rough sledding for rates.
Econ Data / Events
528k vs 250k f'cast, 398k prev
3.5 vs 3.6 f'cast, 3.6 prev
0.5 vs 0.3 f'cast
prev revised to 0.4 from 0.3
Market Movement Recap
08:49 AM Big sell-off following the big beat in the jobs report. 10yr yields up 10bps to 2.792 and 4.0 UMBS down nearly 3/4ths of a point. Stocks down 1% due to Fed policy implications.
10:31 AM Additional weakness after the last update, but possibly (hopefully?) leveling off now. MBS down almost a full point and 10yr yields up 14.4bps at 2.838.
01:39 PM Slow, steady recovery, but not making much of a dent yet. MBS now down "only" 3/4ths of a point and 10yr yields up only 13.5bps at 2.83% (previously as high as 2.87%).
03:32 PM Brief, illiquid dip in MBD just before the 3pm close, but back in line with previous levels now. 4.0 coupons down 7/8ths of a point on the day and 10yr yields up 13.3 bps to 2.827
This morning's jobs report showed payroll creation at 528k for July compared to a median forecast of 250k and a previous reading of 398k. Perhaps equally as damaging to the bond market, wages came in at 0.5 vs 0.3 f'cast and were revised up another 0.1 last month. Potent arguments against recession (or in favor of wage inflation) spell trouble for bonds. This morning's reaction has been immediate and severe, as was the similar argument made by the ISM services data 2 days ago. These two reports account for the biggest selling sprees of the past several weeks.
In terms of nearer-term Fed rate hike expectations, today's jobs report was even more damaging than ISM. Traders now see the Fed hiking another quarter point by the end of 2022.
The damage done by the strong economic data hits bonds in a different way compared to the inflation reports that rocked the market in June and July. Inflation does more to push rate expectations up in the shorter term whereas strong econ data keeps rate expectations higher for longer. The chart below shows how this played out between July's CPI inflation data and the more recent ISM Services report and today's jobs report.
Notably, the strong data has helped the green line close the gap to the orange line. In other words, in late July, traders saw the Fed Funds Rate being a quarter point lower by mid 2023 vs Dec 2022. Now they don't see much difference at all.
If there's a saving grace it's that the market has been less and less troubled by the data compared to June's CPI. That said, June's CPI report came out only a few days before the Fed announcement and markets weren't certain how the Fed would react. This time around, their reaction function is better understood.
Please answer the short questionnaire at the end of the Commentary. Okay, just kidding. I have grown to really dislike a survey request after I stay at a hotel, fly somewhere, or fill up at the gas station. But for brokers who wouldn’t mind providing a little input, a fintech company that I know of is looking for “a preferred tech stack.” Brokers who wouldn’t mind shooting me a quick email (anonymous, just replying to this commentary) listing your preferred technology providers for a pricing engine, POS (Point of Sale), and LOS (Loan Origination System), and why, would be appreciated. Streamlining the borrower experience is the name of the game, if one can find LOs and borrowers. With that in mind, help in finding LOs that match the strengths of your company strengths, so they are successful with the greater opportunity of retaining them for the long run is always a good thing, and thus Jeff Walton from Ingenius is co-hosting The Mortgage Collaborative’s Rundown today at noon PT/3PM ET. I hear this time and time again: If companies think that they’re going to continue to expand and grow by ignoring and mistreating their customers, they haven’t been paying attention to what happens in the marketplace. (Available here, this week’s podcast is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology and other services in the mortgage industry and in banking. Today’s has an interview with John Paasonen, co-founder, and CEO of Maxwell, on how Millennial and Gen Z homebuyers are transforming the mortgage market.)
Refreshingly Resilient Ahead of Jobs Report
Bonds began the day with a slight boost from Europe's reaction to the Bank of England announcement (emphasis on "slight"). Gains faded heading into the 9:30am NYSE open, but bounce back in short order. Both MBS and Treasuries remained sideways in modestly stronger territory since then. In so doing, yields opted to remain below the 2.71% pivot point that had offered resistance on several occasions since being broken as a ceiling on Tuesday. This is a resilient showing ahead of Friday's big jobs report, and not one that suggests too much exuberance. Simply put, bonds look ready to digest (and react to) any major message about the economy in the jobs data.
Econ Data / Events
260k vs 259k f'cast
1.416m vs 1.370m f'cast
Market Movement Recap
09:51 AM Stronger in the late overnight session after the Bank of England announcement. No major impact from data at 8:30. Selling pressure into the 9am hour but finding footing now with Treasuries and MBS holding onto modest gains.
02:40 PM Best levels of the day just after the noon hour. Slight selling since then, but still in positive territory. 10yr down 2bps at 2.687. MBS up 3 ticks (.09) at 100-12 (100.375).
04:28 PM Late weakness starting around 4:15pm--a time of day that suggests tradeflow momentum (as might be seen during corporate bond pricings). MBS are still 2 ticks higher on the day (+0.06) and 10yr yields are still down 1.8bps at 2.687.
This morning's announcement from the Bank of England (BOE) led to a bond rally that helped 10yr yields hit 2.656% and MBS gain more than an eighth of a point in early trading. They've since moderated a bit and will spend the rest of the day getting into position for tomorrow's jobs report. Technicals, corporate issuance, Fed comments, geopolitical developments, fuel prices, and general big-picture strategic positioning (and/or asset allocation trading) are all vying for some measure of input. To say that such a laundry list implies volatile, expanded intraday ranges would be an understatement.
In the bigger picture, looking through this week's volatility, yields are still making a case for 2.70-2.71 as a pivot point after having bounced there yet again this morning. The following chart contains hourly (as opposed to the typical "daily") candlesticks. It shows a good case for overhead support at 2.82 in the event 2.71 is challenged again. Just remember...
Regular readers are all too familiar with my fairly regular habit of explaining discrepancies between reality and the typical mortgage rate headlines on Thursdays. What's up with Thursday? That's when Freddie Mac releases its weekly mortgage rate survey. Freddie's survey is the longest-running, most deeply entrenched catalog of historical mortgage rates in the industry. It serves as the foundation of strategic market analysis in several sectors. It is the most widely-cited source for the news media's mortgage rate coverage. It is even relied upon for certain calculations that determine whether loans violate certain lending laws. All of the above is tremendously unfortunate by the time we consider just how stale the information can be. Not to put too fine a point on it, the survey is best thought of as measuring rate changes from Monday to Monday, but waiting to report that number until Thursday morning at 10am ET! Why the delay? The survey's official response window runs through Wednesday. In that sense, the Thursday morning release time seems more reasonable. Unfortunately a vast majority of the responses are in by Monday. Freddie officially states that most responses are received on Tuesday, but this is either not true or those responses are coming in early Tuesday morning before lenders update their rates for the day. This is a longstanding contention of mine and if there was ever a report that confirmed it, it's today's! Here's why:
“Senility has been a smooth transition for me.” So quipped an attendee here at the Michigan Mortgage Lenders Association conference in Grand Rapids. The aging mortgage banker workforce continues to be a concern around the nation, but there are certainly lenders and vendors attempting to “bring in new blood.” The FTC’s $62 million fine of Opendoor’s advertising policies raised eyebrows. We had the news of Two Harbors Investment Corp.’s Matrix Financial Services Corporation entering into a definitive stock purchase agreement to acquire RoundPoint Mortgage Servicing Corporation from Freedom Mortgage Corporation. People are talking about the Equifax alleged miscalculating of consumer’s credit scores. (But could they have resulted in both worse and better mortgage pricing?) There is a fair amount of discussion is about the difficulty of the deals that are out there, and how various derivations of pre-qual, pre-approval, and To Be Determined (TBD) programs can help. Some lenders are here to learn about lock and shop programs that are being offered. Of course these programs have a cost, usually credited back when the loan funds, and anything set up should be with the help of your compliance department! (Today’s podcast is available here and this week’s is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology and other services in the mortgage industry and in banking. Listen to an interview with Will Robinson, CEO of Encapture, on how mortgage banking professionals can use machine learning to lower overhead costs and increase team capacity.)
Surprisingly Resilient After Stronger ISM Data
Wednesday's key data point was the ISM Non-Manufacturing index. The ISM indices always have the power to move markets. Their relevance is arguably amplified at present as investors sift through cues regarding inflation and economic contraction. While the inflation component of the data was moving in the right direction, prices continued to rise. More importantly, the parts of the report that concern the health of the services sector were more than strong enough to justify brisk, additional selling pressure in the bond market. 10yr yields spiked almost 10bps in response and MBS lost almost half a point, but both managed to recover all of those losses and then some.
Econ Data / Events
ISM Services PMI
56.7 vs 53.5 f'cast
ISM Services 'Activity'
59.9 vs 54.0 f'cast (highest since Jan)
ISM Prices Paid
72.3 vs 80.1 prev (lowest since Feb)
Market Movement Recap
09:02 AM Stronger in Asia, then weaker in Europe, largely in response to Spanish PMI data at 3:15am. Gradual selling continued into domestic hours with 10s now up 3.6bps at 2.787 and MBS down 6 ticks (.19).
10:13 AM Friendly lead-off ahead of ISM. Unfriendly selling spree since then. MBS and Treasuries both at weakest levels of the day. 10yr 2.823 and MBS down almost 3/8ths.
11:50 AM Slow steady progress after the ISM-driven sell-off. MBS near the day's best levels with 4.0 coupons down only 2 ticks (0.06). 10yr back to 2.779 after being as high as 2.851.
01:04 PM Right in line with levels from the last update after briefly turning positive on the day. Bonds look like they might try to do it again shortly.
We've devoted lots of time and space recently to discussing the uncommon mortgage rate environment recently. The abbreviated thesis can be reduced to a few key bullet points:
Mortgage rates involve both the rate itself and the upfront cost required to obtain that rate.
Recently, there is much less distance between any two interest rates in terms of upfront cost.
This makes the rate quote environment highly stratified between lenders.
It also means mortgage rates can change much more abruptly for any given move in the bond market (bond prices are the key ingredients in determining mortgage rates).
With bond prices' ability to move rates already amplified, a relative big move in bonds has translated to record changes in rates. This happened in our favor starting last Thursday and has been reversed as of today. The initial drop in rates lasted 3 days (Thu/Fri/Mon) and the correction was in place as of this morning. If all the above is true, we should be able to look at bond prices (which move inversely to rates) and see 3 days of gains offset by 2 days of losses resulting in roughly similar levels to Thursday morning. The data does not disappoint! In nuts and bolts terms, the half point of improvement and deterioration roughly corresponds to the average lender moving from 5.50% to 5.0% and now back up to 5.50% all in the space of 5 days. This herculean round trip may exist in the past, but not since we began keeping daily rate records in 2008.