Wednesday brought a full schedule of events and data for the bond market to digest and bonds dictate day to day changes in mortgage rates.  The morning’s data was perfectly palatable, resulting in modest strength heading into the afternoon’s Fed announcement. Contrary to impression given by many news headlines on Fed day, there is rarely any significance to the Fed’s actual decision to hike/cut/hold steady at any given meeting by the time the meeting actually happens.  Markets will have long since priced in the likely outcome based on economic data and Fed policy transparency. In other words, it was a surprise to no one that the Fed held rates steady at this meeting.  Bond traders tuned in for other reasons–mainly to hear what Powell had to say at the 2:30pm ET press conference. There were a few ways Powell could have framed the recent set-backs seen in inflation data.  Some analysts thought he might say more to entertain the possibility of rate hike instead of a rate cut.  Powell (and, indeed, the Fed announcement itself) definitely acknowledged that inflation data meant a delay for the Fed’s next move, but in the press conference, Powell reiterated that the next move was much more likely to be a cut, based on the trajectory of the data.   Bonds improved and many mortgage lenders were able to re-issue slightly lower rates compared to the morning levels.  The average 30yr fixed rate is still elevated by 2024’s standards, but nicely lower compared to yesterday’s latest levels.

Plaintiffs seeking class certification claim the bank uses an underwriting system that discriminates against minority mortgage applicants.

Profits in the originations and servicing segment at Newrez drove earnings, while a possible spinoff of Rithm’s mortgage operations is still seen as a “work in progress,” according to company leaders.

Though written before the internet era, the book about working at Salomon Brothers in the 1980s that launched Michael Lewis’ writing career still holds important lessons about the true costs of success.

Rep. French Hill, the No. 2 Republican on the House Financial Services Committee, promised bankers Tuesday that he will continue to push back against Biden administration regulators, especially on bank-fintech partnerships and digital assets.

The investment giant said its direct-to-consumer channel will offer ancillary products in preparation for any future refinance environment.

More Ammo For a Hawkish Fed, But Data is at Least as Important

Bonds began the day flat but lost ground quickly after ECI came in higher than expected.  This is the latest in a string of unfriendly data for the bond market.  It proves additional ammo for the Fed to table the notion of rate cuts in 2024–something that Powell had already mentioned in his last speech.  Even before this data, there was already zero chance of a rate cut tomorrow.  As Powell is likely to remind the market, the prospect of rate changes later this year depends entirely on economic data.  On that note, Wednesday’s reports may provide just as much of a directional impulse as the market’s reaction to the Fed.  In addition to JOLTS, ISM, and ADP we’ll also get the final details on Treasury’s quarterly refunding which may include a buyback announcement.  It’s not that we necessarily expect that to cause a huge reaction, but it adds another layer of complexity to a very busy day.

Econ Data / Events

Employment Cost Index

1.2 vs 1.0 f’cast, 0.9 prev

Case Shiller Home Prices (y/y)

7.3 vs 6.7 f’cast, 6.6 prev

FHFA Home Prices (y/y)

7.0 vs 6.5 prev

Chicago PMI

37.9 vs 45.0 f’cast, 41.4 prev

Consumer Confidence

97.0 vs 104.0 f’cast, 103.1 prev

Market Movement Recap

08:35 AM MBS down a quarter point and 10yr up 5bps at 4.66 after ECI data.

11:29 AM Very sideways after initial weakness.  MBS down 7 ticks (.22). and 10yr up 4.2bps at 4.656

02:45 PM 10yr yields are up 6.3 bps at 4.677 and MBS are down just over a quarter point

03:25 PM More losses after the 3pm CME close (month-end selling).  10yr up 7.6bps at 4.689.  MBS Down 3/8

04:34 PM Going out near the weakest levels with MBS down almost 3/8ths and 10yr yields up 6.4bps at 4.678

A mortgage rate is highly subjective and can vary for a variety of reasons.  A news story that provides an outright level like 7.5% requires context and qualification.  Some online advertisements (especially among builders) could still be showing rates in the high 6’s.  Some borrowers will be seeing rates of 7.625 or higher.  Loans with less than 25% down will have higher and higher costs, either in terms of upfront closing costs or the rate itself.  Investment properties incur significant extra costs as do lower credit scores (you start getting hit for anything under 780 in many cases these days).   These are just a few considerations to illustrate the point that a 30yr fixed rate isn’t necessarily apples to apples. Fortunately, we can control for most of the variables by only ever looking at the same scenario, free from most of the subjective adjustments.  We can also control for the practice of advertising lower rates by quoting them with implied discount points (extra upfront cost that goes toward “buying down” the prevailing rate). That’s one of the reasons the MND index is higher than Freddie Mac’s weekly survey. All that to say, 7.5%+ might not be the exact rate you see today, but after adjusting for everything we can control, that’s the most prevalently quoted top tier conventional 30yr fixed rate again today.  It’s the 3rd time we’ve seen 7.5 in the past 2 weeks. Today’s increase followed the release or the Employment Cost Index–one of the economic reports the Fed watches closely in determining rate policy.  In not so many words, it suggested higher momentum in price pressures than previously expected.  This wasn’t necessarily out of line with any of the other recent inflation-related reports, but the confirmation was worth a bit of extra weakness in rates nonetheless.

Home price increases continued to accelerate in February even as interest rates also moved higher. Both the S&P CoreLogic Case-Shiller Indices and the Housing Market Index (HMI) produced by the Federal Housing Finance Agency (FHFA) showed annual price growth in the 7 percent range. Case-Shiller’s U.S. National Home Price Index, which covers all nine U.S. census divisions, reported a non-seasonally adjusted 6.4 percent annual gain in February, compared to a 6.0 percent rise the previous month. The 10-City and 20-City Composites rose 8.0 percent and 7.3 percent respectively, up from 7.4 percent and 6.6 percent increases in January. San Diego continued to report the highest year-over-year appreciation among the 20 cities at 11.4 percent followed by Chicago and Detroit, each posting 8.9 percent growth.  Portland still holds the lowest position at 2.2 percent. The three non-seasonally adjusted indices posted monthly gains for the first time since November. The National Index rose 0.6 percent, the 20-City was up 0.9 percent, and the 10-City Composite grew 1.0 percent.  After seasonal adjustment, the increases were 0.4 percent for the National Index and 0.6 percent for each of the composites.   “U.S. home prices continued their drive higher,” says Brian D. Luke, Head of Commodities, Real & Digital Assets at S&P Dow Jones Indices. “Our National Composite rose by 6.0 percent in January, the fastest annual rate since 2022.   For the third consecutive month, all cities reported increases in annual prices, with  four currently at all-time highs: San Diego, Los Angeles, Washington, D.C., and New York. On a seasonal adjusted basis, our National, 10- and 20- City Composite indices continue to break through previous all-time highs set last year.”

Steering clear of unfriendly economic data has been an increasingly challenging task for the bond market in April.  While it might be an overstatement to say we’re going out with a bang, today’s Employment Cost Index (ECI) is at least a loud pop.  ECI–a measure of labor costs and compensation (including benefits)–is not a report that had been on the trader radar as a big ticket market mover until Powell began mentioning it regularly in the past few years. 
Today’s installment painted an unfriendly picture for inflation/rates by suggesting the progress seen through Q4 was reversing in a major way in Q1.

The bond market reaction was clear and immediate at 8:30am, even if it wasn’t as huge as we might see for a CPI or NFP that suggested hotter inflation or spending power.