Mortgage applications saw a significant jump for the second consecutive week, as homeowners took advantage of plummeting rates, the MBA said.

Powell Press Conference Trumps The Dots, Sparking Moderate Sell-Off

Of today’s Fed events (rate announcement, dot plot, and press conference), it was the dots that were most likely to cause the biggest reaction. That proved to be the case, but only for the 30 minutes leading up to Powell’s presser.  Bonds had already begun pushing back against the rally by the time Powell started fielding questions.  Several of his responses added fuel to the fire. In not so many words, Powell said the dots don’t mean the Fed is cutting twice more in 2024 and that the Fed will instead be taking things meeting by meeting as they digest incoming econ data. While that’s very standard for the Fed playbook, it didn’t convey the level of concern for the economy (bullish for rates) that the market was priced for.  The reversal seems extreme in the short term due to the dot-driven rally, but yields closed no higher than they did last Tuesday–2 days after the jobs report rally that took rates to their lowest levels since October. 

Econ Data / Events

Building Permits (Aug)

1.312M vs 1.37M f’cast, 1.362M prev

Housing starts number mm (Aug)

1.307M vs 1.37M f’cast, 1.428M prev

Market Movement Recap

09:48 AM Modestly stronger overnight and little-changed so far this morning.  MBS up 1 tick (.03) and 10yr down half a bp at 4.027

11:34 AM Just barely weaker now.  MBS down 1 tick (.03) and 10yr up less than half a bp at 4.035

02:06 PM Stronger after the dot plot.  MBS up just over an eighth and 10yr down 3.3bps at 3.998

02:40 PM MBS now down 2 ticks (.06) on the day. 10yr yields are up 2.3bps at 4.053

02:56 PM MBS now down a quarter point on the day and 10yr up 5bps at 4.08

Several things happen on Fed Day–especially on the 4 out of 8 examples with updated rate forecasts from Fed members.  The official announcement of a rate cut is typically the least important aspect.  In fact, it is usually entirely unimportant in terms of its impact on mortgage rates. Instead, the bonds that determine mortgage rates are much more likely to react to the Fed’s dot plot (the chart showing each Fed member’s rate forecast over the next few years) and the press conference with the Fed Chair. The dots are released at 2pm at the same time as the rate cut announcement.  The press conference follows at 2:30pm and usually lasts 50 minutes. This staggered timing makes for plenty of back and forth volatility on occasion and today was a prime example.  The dots helped bonds because they signaled better odds for two additional cuts in 2025 as opposed to only one.  The market was mostly expecting that, but it wasn’t fully priced-in to prevailing rates.  Things changed during Powell’s press conference and bonds ended up more than reversing the initial move. Powell framed today’s cut as a “risk management” cut and emphasized that the forecasts in the dot plot do not represent a plan for future cuts. Rather, the Fed will continue to take things on a meeting by meeting basis and make decisions based on the new data that becomes available over that time. As the underlying bond market responded, most mortgage lenders issued mid-day changes to the rates announced this morning. The net effect is that mortgage rates are most certainly HIGHER this afternoon compared to yesterday’s latest levels, not to mention this morning’s. 

Consumers are 19% more likely to pay their auto loans than their mortgages, which is a shift in attitude from the pandemic period, FICO said.

The transaction combines independent mortgage companies which are based in Strongsville, Ohio (East Coast) and Folsom, California (West Coast).

Housing finance firms have anticipated a 25 basis point move, so what could move the needle is less that outcome than actions that go beyond or differ from it.

A federal judge in Colorado ruled that the appraisal discrimination case raised by the government against both Rocket and Solidifi will move forward.

If the Fed reinvested the roughly $18 billion in monthly “roll-off” into new MBS, it could compress mortgage spreads, the investment management firm said.

Big Shift Toward 5.0 Coupons Continues

Mortgage rates have lurched rapidly lower in September as 5.0 UMBS have stolen the show from 5.5 UMBS. As a reminder, there is only a certain range of rates allowed in either bucket. 5.5s go all the way up to 6.625% and investors buying MBS would prefer not to get stuck holding a burning bag of 6.625% loans in a market where those borrowers are already on the edge of being in the money on a refi. Bottom line, it’s the fastest/biggest shift in 5.0 outperformance since late 2023, and today’s installment brought the spread between the two coupons to the tightest levels since early October 2024.  Lo and behold, that’s the last time rates were in this territory. Spreads spiked back to wider levels on October 4th owing to a strong jobs report. This October’s jobs report will be in focus for similar reasons, but before that, near-term volatility risks surround Wednesday’s Fed dot plot.

Econ Data / Events

Export prices mm (Aug)

0.3% vs 0% f’cast, 0.1% prev

Import prices mm (Aug)

0.3% vs -0.1% f’cast, 0.4% prev

Retail Sales (Aug)

0.6% vs 0.2% f’cast, 0.5% prev

Retail Sales (ex-autos) (Aug)

0.7% vs 0.4% f’cast, 0.3% prev

Retail Sales Control Group MoM (Aug)

0.7% vs 0.4% f’cast, 0.5% prev

Market Movement Recap

09:04 AM Initial weakness after Retail Sales, but avoiding sharp selling.  MBS unchanged and 10yr only up 1bp at 4.049

10:02 AM Very decent recovery. MBS up 1 tick (.03) and 10yr down almost 1bp at 4.033

11:56 AM MBS unchanged to 1 tick (.03) weaker.  10yr down 0.9bps at 4.032

03:14 PM Holding modest gains.  MBS up 2 ticks (.06) and 10yr down 1.3bps at 4.027

Mortgage rates dropped sharply lower today relative to the amount of movement in the underlying bond market with the average lender right in line with the lowest levels since late 2022. Because rates are directly tied to the prices of those bonds, the correlation tends to be almost perfect over time. [thirtyyearmortgagerates] But there are always scattered examples of one leap-frogging the other. These inconsistencies can arise for several reasons. In today’s case, it happened due to late-day strength in bonds yesterday afternoon coupled with the structure of the underlying mortgage bond market. An explanation of the latter would be woefully esoteric in the context of a daily mortgage rate update–even for industry professionals. In the simplest possible terms, it has to do with the range of interest rates allowed in each grouping of mortgage backed securities (MBS). As investor sentiment shifts in favor of the next lower grouping, it effectively greases the skids for rates to slide down into the range associated with that grouping. The overall set-up is reminiscent of September 2024 when rates were doing the same thing for the same reasons ahead of Fed meeting with a virtual 100% chance of a rate cut. Back then, mortgage rates moved paradoxically higher after the Fed rate cut.  The same thing could happen this time, but it’s by no means guaranteed. In fact, last year’s Fed rate cut wasn’t the catalyst for rising mortgage rates. Instead, it was an upbeat shift in economic data in early October. In other words, rates will take their next major cues from incoming economic data over the next few weeks.