Will September Deja Vu Continue?

Rates rallied hard into last September 2024’s Fed rate cut and then bounced relentlessly higher.  With average rates up about a quarter point since Tuesday, the parallels are certainly there.  But Last year’s spike didn’t happen so abruptly on Fed day and the day after.  It required upbeat econ data to send rates screaming higher. In today’s case, we had two separate upbeat reports. This was barely worth an eighth of a point of weakness in MBS and not even 3bps of weakness in 10yr yields, but on average, lenders are feeling defensive (when MBS prices were at the same levels 2 weeks ago, rates were almost 10bps lower). The good news is this: the deja vu is both coincidental and driven by objective developments. It’s not on a pre-set course and it won’t continue if incoming economic data is weak. The bad news is that if the incoming data is surprisingly strong, well… you know.

Econ Data / Events

Continued Claims (Sep)/06

1,920K vs 1950K f’cast, 1939K prev

Jobless Claims (Sep)/13

231K vs 240K f’cast, 263K prev

Philly Fed Business Index (Sep)

23.2 vs 2.3 f’cast, -0.3 prev

Philly Fed Prices Paid (Sep)

46.80 vs — f’cast, 66.80 prev

Market Movement Recap

08:23 AM MBS up an eighth and 10yr down 1.6bps at 4.064

08:37 AM Slightly weaker after data.  MBS still up 1 tick (.03) and 10yr up 0.1bps at 4.081

09:39 AM Losses continue.  MBS down 6 ticks and 10yr up 4.9bps at 4.129

12:27 PM sideways after early losses.  MBS down 3 ticks (.09) and 10yr up 3bps at 4.111

03:17 PM MBS down just over an eighth and 10yr up 3.4bps at 4.115

JPMorgan Chase, Citigroup, Wells Fargo and Bank of America, PNC Bank, N.A. and others announced a decrease in its prime lending rate to 7.25 percent, effective today, Sept. 18. As expected, the U.S. Federal Reserve cut the overnight Fed Funds rate by .250. Stephen Miran, who was sworn in just before the two-day policy meeting and is remaining a White House employee for the duration of his stint at the Fed (much to the concern of those wanting an independent Federal Reserve) was the lone dissent among Federal Open Market Committee (FOMC) participants, instead favoring a 50-basis-point reduction. Mr. Miran has echoed President Trump’s criticisms of the central bank and called for cheaper borrowing rates. “Rob, I heard a presenter saying that U.S. citizens are saving no money whatsoever. What are you hearing?” I would say that statement is misleading and sensationalist and generalized. Savings vary through different periods of our lives, and different classes save differently. The Fed has a nice graph showing that, aside from COVID when we were hoarding toilet paper and watching Tiger King five years ago, we’re around 5 percent, which is roughly where we’ve been historically. (Today’s podcast can be found here and this week’s are sponsored by CreditXpert. The all-new credit optimization platform that helps you close more loans. CreditXpert is committed to making homeownership more accessible and affordable for ALL. Today’s features an interview with Indecomm’s Rajan Nair on the risks of falling behind in innovation, whether AG(entic)I hype distracts from present issues, and the growing concern over technology power being concentrated in the hands of a few.)

This morning’s economic reports (jobless claims and Philly Fed) are not notoriously big market movers, but many analysts gave ample credit to Claims for driving last Thursday morning’s rally.  Now today, claims are right back in line with the same low levels from 2 weeks ago.  Continued Claims are also much lower than expected, including a friendly revision to last week’s number.  A much stronger Philly Fed result isn’t really helping, even if it’s probably not hurting as much as the jobless claims reversal. Bonds were slightly stronger before the data, but yields are beginning to lift off since then.

Surprisingly big reaction to this data in Fed Funds Futures (nearly as big as yesterday’s Fed announcement).

But not super huge in the bigger picture.

Same chart as above, with 10yr yields on a separate axis.

The Federal Open Market Committee’s decision to reduce interest rates for the first time in nine months lifted bank stocks Wednesday. The 25-basis-point reduction could lead to net interest income headwinds now, but loan growth later, analysts said.

The Community Home Lenders of America and the Community Associations Institute want the FHA to insure loans on condos approved by Fannie Mae and Freddie Mac.

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

The deal for the Class A office building owner will be funded from Rithm’s cash as well as liquidity on the balance sheets, plus possible co-investors.

Most lenders said they had already priced in the widely-anticipated decision to cut short-term rates for 30-year home loans but other products will benefit.

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.