Just Another Day of Waiting

Bonds started stronger, retraced back to ‘unchanged’ following the manufacturing data, and proceeded to grind out moderate gains by the end of the day.  It was a reasonably strong result given the absence of bullish impetus for bonds, but not one that falls outside the range of yields established during last week’s volatile consolidation.  Fed Funds Futures notably rallied such that the 50bp rate cut is once again the leading candidate.  This is a product of trader ruminations and speculation rather than the data.  Between Timiraos’s article last week, and Dudley’s this morning, the market thinks it’s being given clues from insiders. 

Econ Data / Events

NY Fed Manufacturing

11.5 vs -3.9 f’cast, -4.7 prev

Market Movement Recap

08:52 AM moderately stronger overnight but losing some ground after NY Fed Manufacturing data of all things!  MBS unchanged and 10yr up 0.2bps at 3.658

12:31 PM Steady near stronger levels.  MBS up 3 ticks (.09) and 10yr down 2.2bps at 3.632

02:42 PM No major changes from last update. Just a hair stronger.  MBS up an eighth and 10yr down 3bps at 3.624

The  new week began on a relatively quiet note in terms of mortgage rate movement and the underlying bond market.  There was modest volatility earlier this morning with a Manufacturing survey causing some headwinds for bonds.  This would normally lead to slightly higher mortgage rates, but bonds recovered shortly thereafter and spent the rest of the day near their best recent levels. As such, it’s no surprise to see mortgage rates also hanging out near their best recent levels.  The average lender is right in line with the lowest rates since February 2023 for the 4th straight day. That calm, narrow range is at high risk of changing in the coming days.  In addition to more relevant economic data in tomorrow’s Retail Sales report, this week’s biggest flashpoint will be Wednesday afternoon’s Fed announcement.   Traders have quickly shifted back to expecting slightly better odds of a 0.50% rate cut versus the minimum 0.25%.  That’s not even the important part of the announcement, however.  Markets will be more focused on the rate trajectory outlined in the Fed’s economic projections as well as the guidance offered in the text of the announcement and Fed Chair Powell’s press conference.  This will be the first Fed meeting in long time where there has been such an even split in forecasted outcomes.  Any time an outcome is guaranteed to surprise about half the market, it’s pretty much impossible to avoid volatility.  As always, keep in mind that volatility has no directional connotation.  Things could get better or worse!

So far in the new week, bonds have rallied a bit in the overnight session and sold off a bit after this morning’s stronger NY Fed Manufacturing data.  The result is a fairly flat morning with MBS and Treasuries both still just barely stronger.  If there was ever a week to expect “flat” to have a limited shelf life, this is it.  At no other time in the era of abundant Fed transparency has the market been so divided in its expectations of outcomes.  Not only are debates due to be resolved on the size of the rate cut, but we can also assume many market participants will be surprised by the dot plot.  If there’s a saving grace to limit excess volatility, it’s that anything the Fed says on Wednesday will continue to depend on the same economic data that has gotten us to this point.   
Here’s a visualization of the market’s indecision over the past week.  From 50/50 to nearly an 80% chance of a 25bp cut now to a roughly 70% chance of a 50bp cut…

The Pirate goes to the dermatologist and says, “Arrg, I got moles.” The dermatologist says, “Don’t worry, they’re benign.” The Pirate replies, “Arrg, count again, I think there be ten!” Health care, astronomy, and mortgage banking are filled with numbers. Losing daylight is the name of the game these days in the Northern Hemisphere. Chicago, where I head this weekend, is losing three minutes per day of sunlight, Anchorage five minutes, Honolulu one minute. Thanksgiving will be here before we know it; The official conventional conforming loan limits, issued by the FHFA/Freddie/Fannie triumvirate, doesn’t occur until Thanksgiving. But in recent years investors have “jumped the gun;” more below. Speaking of jumping the gun, today is Mexican Independence Day, marking the battle of independence after nearly 300 years of being ruled by Spain, but the celebrations began yesterday in places like Chicago. Things kick off September 15. On this day back in 1810, Father Miguel Hidalgo y Costilla gave a historic speech and rang the church bell which helped inspire the fight for freedom, and the date is helped by it being the birthday of Porfirio Diaz, president and dictator from 1876 to 1911. (Today’s podcast is found here and this week’s is sponsored by Visio Lending. Visio has a top-notch broker program and is the nation’s premier lender for buy and hold investors with over 2.5 billion closed loans for single-family rental properties, including vacation rentals. Hear an interview with Glenn Stearns on the choices that have shaped his mortgage career.)

The lender claims it’s been the first player in the industry to raise the threshold for three years in a row.

Pricing talk includes yields ranging from 4.9% on the AAA, class A1 notes; 5.7% on the AA, class A2 notes; and 6.2% on the AA M1 notes.

Fed Week Uncertainty Makes For Logical Consolidation

Bonds rallied sharply just over a month ago following a downbeat jobs report and other data.  They then consolidated ahead of the early September data before rallying just a bit more.  The present week didn’t add much to the broader context and thus presented a good opportunity for another consolidation ahead of a week that’s sure to spark some volatility.  Friday’s only hope was Consumer Sentiment and it was not up to the task of raising any heart rates.  Bonds began the day in modestly stronger territory and are going out the door at almost the exact same levels.

Econ Data / Events

Consumer Sentiment

69.0 vs 68.0 f’cast, 67.9 prev

1yr inflation expectations 

2.7 vs 2.8 f’cast, 2.8 prev

Market Movement Recap

10:30 AM Slightly stronger overnight and giving back some gains in AM hours.  MBS still up 1 tick (.03) and 10yr down 1.1bps at 3.664.

12:55 PM Bouncing back into positive territory into the PM hours.  MBS up an eighth and 10yr down 2.6bps at 3.649

02:31 PM New highs for MBS, up 5 ticks (.16).  10yr down 2.9bps at 3.645

We’ve talked a lot about why the Fed rate cut will have no additional positive impact on mortgage rates next week.  Everything the market can already reasonably foresee about what the Fed might do is already reflected in today’s mortgage rates. In other words, much of the sharp mortgage rate decline seen in recent months is simply a reflection of the growing odds for lower Fed Funds Rates in the near-term future. But while a Fed rate cut doesn’t guarantee lower mortgage rates, the info that comes out on Fed day can still cause tremendous volatility.  In this particular case, one reason is that the market is fairly evenly split on whether the Fed will cut by 0.25% or 0.50%.  Either way, half of the market will be surprised and that’s a recipe for volatility. In addition, there are other documents released concurrently with the rate announcement that can cause rapid movement in longer term interest rates for better or worse.  That happens at 2pm ET on Wednesday afternoon.  30 minutes later, Fed Chair Powell will field questions from reporters–another Fed day event with the potential to send rates in either direction. By the time all is said and done, we may have seen several back-and-forth moves on Wednesday.  Volatility could continue into Thursday, but while mortgage rates could definitely end up being noticeably higher or lower by the end of the week, the bigger changes in the bigger picture would depend on the most closely-watched economic data due out in the first week of October.

“I pay you to handle my loan and give me a good program with a competitive rate, not predict things you can’t.” At a recent event, a top originator told me that a borrower stated that. I continue to see LOs of all types (bank, credit union, IMB, broker, DTC, whatever) keep an eye on mortgage rates, and know what they’re doing, but focus on service and products, things that they or their company can control. Sure, everyone is predicting that the Federal Reserve’s Open Market Committee (FOMC) will lower rates next week; it’ll be no surprise. What will be interesting are the thoughts by the various Fed district presidents who make up the Committee. Meanwhile, LOs are treating borrowers like prospects, making a difference in their client’s lives, and remembering that they are offering money, not mortgages. (Today’s podcast is found here and Sponsored by Richey May. Richey May’s consulting, cybersecurity, business intelligence, and automation services are designed by mortgage experts to help you continue to drive growth and increase profitability. Hear an interview with Candor’s Ed Kourany on current trends in the mortgage industry, from lender employment to repurchase data and more.) Lender and Broker Software, Services, and Loan Programs Register now for the 2024 Loan Vision Innovation Conference in Chicago, September 23-25! Tailored for financial leaders in IMBs, banks, and credit unions, this event is your key to staying ahead in the competitive financial landscape. LVIC24 offers a unique opportunity to gain the insights and tools you need to drive growth and efficiency within your organization. Learn from mortgage industry titans like Michael Fratantoni, Rob Chrisman, and others through sessions focused on profitability, sustainability, and industry best practices. Enjoy enhanced networking opportunities, including the Opening Dinner + Awards Ceremony and an Evening on the Chicago River.

Today’s only potentially relevant economic data was the 10am Consumer Sentiment data.  This report comes out twice a month, once in “preliminary” form earlier in the month and then in “final” form 2 weeks later.  The first release is typically the only shot for a noticeable market reaction as the “final” tends to be well-telegraphed by the first release.  Despite that fact, today’s preliminary release was a non-event with headline sentiment coming in close to consensus and 1-year inflation expectations ticking down 0.1%. 

With that, bonds continue the process of quietly consolidating in the lower middle portion of this week’s range.

Most of the movement at the end of the week has been in Fed Funds Futures and the shortest term Treasury yields.  The catalyst was a WSJ article discussing the possibility of a 25bp vs 50bp rate cut next week.  The fact that Timiraos is writing on the possibility of 50bp is being taken by some market participants as foreshadowing, even though everyone else is also talking about 25bp vs 50bp in various ways.