Confidence among U.S. home builders slipped for the fourth straight month to its lowest point of the year in August as high loan rates and home prices weigh on companies and buyers alike.

Jobless Claims May Have Hit Bonds Harder Than Retail Sales

Hot take, and one that’s subject to debate, depending on one’s relationship with the bond market: Jobless Claims coming in at 227k vs 235k f’cast was a bigger problem for bonds than Retail Sales coming in a 1.0 vs 0.3.  No need to discuss.  We’ll give you the answer.  What’s the one other thing the Fed brings up as being important to rate cut timing/magnitude besides inflation?  If you said “the labor market,” you win.  Retail sales certainly didn’t help, and some investors will certainly care more about that, but bond traders who are paying close attention to the Fed just got another strong argument against the low rate vibes in the last big jobs report.  Confirming this is as easy as looking at last week’s even smaller jobless claims beat and seeing quite a similar reaction.

Econ Data / Events

Jobless Claims 

227k vs 235k f’cast, 233k prev

Retail Sales

1.0 vs 0.3 f’cast, 0.0 prev

Philly Fed

-7.0 vs +7.0 f’cast, 13.9 prev

NY Fed Manufacturing

-4.7 vs -6.0 f’cast, -6.6 prev

Market Movement Recap

09:25 AM sharply weaker after econ data.  MBS down more than a quarter point.  10yr up 9.6bps at 3.932

11:30 AM Still near weakest levels with MBS down 3/8ths and 10yr up 9.6 bps at 3.932.  Minimal movement since initial sell-off

02:28 PM Off weakest levels.  MBA down a quarter point and 10yr up 8.7bps at 3.923

Mortgage rates had moved a bit lower since their most recent high last Thursday.  By yesterday afternoon, the average lender had moved down to 6.49 from just under 6.63 for a top tier conventional 30yr fixed purchase. After this morning’s economic data, almost all of that improvement was erased. There were 5 separate reports in the 8:30am ET time slot, but 2 of them did all the damage.  Retail Sales came in at 1.0% for the month of July, compared to a median forecast of 0.3%.  Stronger sales implies a stronger economy and higher rates, all other things being equal. The other report was less of an obvious problem for rates at face value, but arguably at least as important to traders responsible for bond market movement.  Weekly jobless claims numbers were modestly lower than expected (227k vs 235k forecast).  While this doesn’t seem like a big deal, this timely labor market data is being closely watched in order to validate or reject the idea that the jobs market is cooling as much as the last big jobs report suggested. One reason to pay extra attention to every little piece of labor market data is the fact that the Fed has explicitly said the labor market is occupying more of its focus as it considers when to cut rates and by how much.

Looking at the attendees of various mortgage events around the nation over the last several months, I remember back to when a “new hip joint” meant some place that I wanted to go on a Friday night. Here at the MMLA Conference in Boyne Falls (if you ever have a chance to visit in the summer or autumn, do so!), where there is definitely some youth appearing, one of the dinner discussions was “remember back when everyone was hiring” and whether hiring is on the upswing. For some companies, the answer is definitely “yes” and this month’s STRATMOR blog is titled, “Hiring: Do You Remember How to Do That?” Another discussion topic is the feeling that most lenders have definitely “turned a corner” in terms of profitability and had a good second quarter for various reasons. Let’s hope your numbers validate that! (Today’s podcast is found here and this week’s is sponsored by Truv. Truv lets applicants verify income, employment, assets, insurance, and switch direct deposits. Unlock the power of open finance, with Truv. Hear an interview with Marvin Chang on how mortgage originators can tailor products and services for the next generation.) Lender and Broker Software, Services, and Products ICYMI: Last month, Optimal Blue unveiled three new AI capabilities in the CompassEdge hedging and trading platform as part of its ongoing strategy to address real-world challenges for mortgage lenders. The first, Profitability Assistant, designed for CFOs, uses generative AI to write a succinct summary of the top drivers that caused a gain or loss of profitability in a pipeline. The second, Projections Assistant, assists capital markets leaders in predicting the real-time impact of various factors on the risk profile of a hedged mortgage pipeline. Finally, Trade Assistant suggests a combination of sells, buys, rolls, and swaps to maximize effectiveness in alignment with a lender’s hedge policy, while minimizing transaction cost. These AI assistants aim to reduce manual processes, aligning with Optimal Blue’s mission to maximize lenders’ profitability on every loan. These new AI capabilities come at no additional cost to CompassEdge users. Read more in the press release.

The record will show that today’s Housing Market Index (aka “builder confidence”) from the National Association of Homebuilders (NAHB)/Wells Fargo fell to 39 from 41 last month.  That’s the 4th straight month of declines and the lowest level of the year.  On the other hand, it’s also part of a broad, sideways pattern that’s been intact since late 2022. While we are well aware that the lockdowns caused the big drop in early-to-mid-2020, what’s up with the equally big drop in 2022?  This is almost exclusively a factor of interest rates. If we invert the red line (such that higher interest rates are at the bottom of the chart), we can see just how strong the correlation is. This isn’t the construction industry’s only problem, but it’s definitely the biggest.  Understanding this helps us understand why timing is partly to blame for this month’s lower-than-expected reading.  A vast majority of the survey responses arrived in the first week of the month, which means the recent drop in rates hadn’t yet had time to stir up new buyer traffic. To be clear, even if the survey were taken today, it wouldn’t make a huge difference in the big picture.  First off, the data tends to lag mortgage rate movement by roughly 2 months.  Even if it didn’t, the present level of rate movement won’t be enough to get confidence numbers out of the sideways bigger picture trend. For that, rates would need to drop into the 5% range and material/labor costs would have to remain in check.  

It’s a surprisingly straightforward morning for the bond market.  The two most important economic reports did exactly the opposite of what bond bulls wanted.  The biggest shock was obviously the 1.0 vs 0.3 result in Retail Sales.  Even though this was substantially driven by a bounce back in auto sales, the remaining improvement was broad-based. 
The other data was not as attention-grabbing, but arguably just as important to investors who’ve been on the edge of their seat waiting for more labor market evidence after the last jobs report.  Weekly jobless claims continue coming in lower than the same week in 2023 for the 2nd straight week now.  Moreover, the unadjusted trend is well in line with recent years (i.e. nothing dramatic happening in the labor market yet = no case for a 50bp rate cut). 

Yields are sharply higher as a result.

The Federal Housing Administration may soon complete the modernization of “face-to-face” rules and end a temporary, partial exemption from the original mandate.

Nearly two-thirds of consumers in a July survey said they expect mortgage rates to decline soon, but most want to see them cross a very specific threshold before they act, Mphasis Digital Risk found.

Specialized Portfolio Servicing’s sale resolves questions about it that arose when UBS bought the troubled Credit Suisse last year.

Thanh Roettele will help guide the Canadian bank’s growth in the mortgage warehouse space in one of its latest moves aimed at the U.S. market.