It’s been a strange and frustrating couple of weeks for anyone who mistakenly believed that mortgage rates would move lower after the Fed rate cut.  To be sure, there is plenty of that sentiment out there according to the just released Fannie Mae sentiment survey showing the highest net percentage of respondents who thought rates would go down since the survey began in 2021. To be fair, the survey asks about a 12 month time frame and a lot can happen in 12 months.  As for the 3 weeks since the Fed rate cut, however, things have not been great.  Today’s rate movement added insult to Friday’s injury with the market still working through the momentum created by Friday’s stronger jobs report. Given the motivations for the rate spike and the available economic data, it’s unlikely that rates will move quickly back down to the levels seen in mid September.  They’d need a lot of downbeat economic data to do so.  Even then, traders would still be waiting to see what the next jobs report had to say before getting too carried away. Meanwhile, there’s some risk of additional weakness in rates if the economic data is more resilient than expected.  The average lender is already back up to levels last seen in early August. Bottom line, markets got locked into the belief that data would slowly deteriorate (with a lot of weight being given to the last few jobs reports) only to see the most recent jobs report say “not so fast!”  There’s a bit of a re-set happening at the moment.  We can’t know exactly how big it will be until we get through more econ data.  Unfortunately, this week is much lighter than last week in that regard.  

Yesterday I flew west to Philadelphia (“Philly”) to spend some time with the Spring EQ sales team. It is a well-known fact that the process of boarding a plane takes about twice as long as deplaning: predictably passengers take longer to find their seats and settle in versus grabbing their belongings and heading for the door. What isn’t so predictable are mortgage rates. Why have mortgage rates gone up when they were supposed to have gone down following the Fed’s move? Tune in tomorrow at noon PT to the Capital Markets Wrap, presented by Polly, to find out. Many people predicted a significant hurricane season with climate change, but there had only been one hurricane by mid-August causing some to revise their predictions. There was even talk that less damage would mean savings for insurance companies resulting in savings for us, instead of more dramatic price increases for consumers. But we are reminded that “Mother Nature bats last.” (Today’s podcast is found here and this week’s is sponsored by LoanCare. The mortgage subservicer is known for delivering superior customer experience through personalization and convenience. LoanCare is part of Fidelity National Financial, a Fortune 500 company and leading provider of services to real estate and mortgage industries. Today hear an interview with Megan Anderson on how young people can better carve out careers for themselves in the mortgage industry.) Lender and Broker Software, Services, and Loan Programs

Here’s a repeat of the lock/float considerations posted on Friday after the jobs report: “Friday’s strong jobs report and resulting bond market rout change the calculus for rate expectations until further notice. Traders now need new data to reinvigorate the case for an economy that’s weakening enough to support the Fed’s expected case of rate cuts. As big as Friday’s sell-off was, it still makes sense to view it as the start of a trend toward higher rates until the market proves otherwise.” 
Big reactions to NFP–especially those that follow a consolidation period–often lead to momentum that remains intact for days if not weeks.  The only potential saving grace here is that we already had a bit of negative momentum heading into last Friday.  Even so, it makes more sense to plan for it to continue until data speaks up in favor of a reversal. If we’re simply waiting for traders to be tired of selling, that conversation doesn’t really start until 10yr yields are closer to 4.15%.
Why 4.15%?  That’s where the bond market was before the recent bout of labor market concern ramped up in early August.  Recall that the early August rally was only as sharp as it was due to the Yen carry trade craziness and that subsequent trading settled in on a range of 3.8 to 4.0.  And that was AFTER a very downbeat jobs report.  Now we have a very upbeat jobs report (and one that incidentally provided a big upward revision of that very downbeat report released in early August).  The fact that 10yr yields are “only” up around 4% is fairly gentle, all things considered.  4.15% would be the first point at which we’d start to wonder if we’d seen enough negative momentum for some old fashioned “technical support.” 

Over 4 million residents in the region, both coastal and inland, face dangers similar to residents in Hurricane-weary Florida, Louisiana and Texas.

Most of the investment community overall showed more favorable sentiment toward one presidential candidate than the other, but a subset of it begs to differ.

The administration wants to implement a 36 hour window of time for companies to report a cyber incident to the agency.

National issues such as the economy are prominent. But so are local concerns like a $10,000 limit on deductions for state and local taxes and high housing costs.

The Federal Reserve and the Consumer Financial Protection Bureau moderately increased the minimum prices at which the Truth in Lending Act applies to loans and leases.

Who Lied About Jobs Numbers?

Unpleasant day for the bond market with jobs crushing forecasts and being revised higher for the past 2 months.  We knew it would be high stakes and the magnitude of the reaction makes good sense relative to the data.  But how do we reconcile this against the weaker jobs numbers in the past 2 months?  And what about reports of a record number of government jobs?  As is often the case, there are nuances and today’s MBS Live recap video offers a deep dive that will help clear up a few of them.  If you don’t have time to watch, the takeaway is that Federal gov jobs were basically flat (adding 1k payrolls whereas state/local gov added 29k payrolls).  For context, the biggest categories in health care and food service each added more than 70k jobs.  

Econ Data / Events

Nonfarm Payrolls

254k vs 140k f’cast, 159k prev

Unemployment Rate

4.1 vs 4.2 f’cast

Wages

0.4 vs 0.3 f’cast
last month revised up to 0.5

Market Movement Recap

08:33 AM Bonds destroyed after strong jobs report.  MBS down almost half a point.  10yr up 9.5bps at 3.943

11:32 AM Flat and right in line with initial sell-off levels.  MBS down half a point.  10yr up 11bps at 3.956

03:09 PM weaker drift continues. 10yr yields up 13.5bps at 3.982.  MBS down 5/8ths of a point. 

Today’s much-anticipated jobs report ended up coming out much stronger than expected.  A stronger result was all but guaranteed to cause carnage (relative) in the mortgage market and that’s definitely what we’re seeing.  A caveat is that rates are still much lower than they were several months ago, but the average lender is now back in line with mid August levels.  Additionally, this is one of the largest single day jumps we’ve seen with the average 30yr fixed rate moving from 6.26 to  6.53.  A move of more than 0.25% in a single day is tremendously uncommon, but it can happen due to the underlying structure of the mortgage bond market.  For those who would like to nerd out on those details, here you go: Whether a mortgage lender is lending their own stockpiles of cash or temporary cash obtained from a credit line, the chunk of cash wired to escrow at closing carries a cost.  For a majority of mortgage lenders, the day to day changes in those costs are determined by the trading of mortgage-backed securities (MBS). MBS are similar to bonds like Treasuries in that investors pay a lump sum of cash and earn interest over time.  They’re different in several key ways.  The most important difference is that the “borrower” of US Treasuries (i.e. the US Government) cannot return principal to the investor and end the deal.  It must continue to pay for as long as it agreed. Mortgage borrowers, on the other hand, can sell/refi/etc and end the mortgage that underlies the mortgage-backed security.  This introduces an element of uncertainty for investors that will be important in a moment.