Surprisingly Big Sell Off Relative to The Inspiration

Bonds ended up selling off somewhat sharply today with the bulk of the blame apparently reserved for the UK/US trade deal. In fact, the pace of the selling wasn’t something we would have predicted when the details emerged this morning. This raises questions about what other motivations could be in play.  Certainly, the “precedent thesis” is relevant (i.e. what does today’s deal imply about how other trade deals may look?). The simplest way to approach it would be to conclude that tariffs will go up enough to increase inflation, but not so much as to hinder growth–both bad for bonds and for the Fed’s rate cut prospects.

Econ Data / Events

Jobless Claims

228k vs 230k f’cast, 241k prev

Unit Labor Costs

5.7 vs 5.1 f’cast, 2.2 prev

Market Movement Recap

09:16 AM Slightly stronger after AM data, but still weaker on the day.  MBS down 1 tick (.03) and 10yr down 1.3bps at 4.283

10:40 AM weakest levels of the AM.  MBS down 6 ticks (.19) and 10yr up 4.6bps at 4.316

02:46 PM sharply weaker after auction with MBS down 3/8ths and 10yr up 10bps at 4.37

Bonds mostly lost ground in the overnight session, and then lost just a bit more ground after the 8:30am econ data.  This consisted of Jobless Claims coming in slightly lower than forecast, and Labor Costs rising to 5.7% for Q1 vs 2.0% in Q4. Of the two, the latter likely accounted for the initial selling impulse, but it was short-lived. Bonds rallied with 10yr yields dropping almost 4bps, and have since bounced back to the weakest levels of the morning (but this is too far removed from the AM data to blame the AM data). The only other relevant scheduled even is the 30yr bond auction at 1pm ET. Apart from that, trade related headlines may cause some ebbs and flows with the US/UK deal being announced.

The San Diego-based lender reported a net loss of $23.9 million for the January-March period, down from a net income of $97.9 million the quarter prior.

Monetary policy is on track to loosen later rather than sooner. Housing finance firms may look more to home equity until or unless a change revives activity.

An index of applications for home purchases jumped 11.1%, the most since January, while a gauge of refinancing increased at a similar rate, according to Mortgage Bankers Association data released Wednesday.

Bill Pulte once again claimed he’s signed over 50 directives at the housing regulator, although he’s only made some of those that affect lenders public.

The comment period for the Affirmatively Furthering Fair Housing interim final rule has been extended, but consumer advocates are clear in their opposition.

There’s nothing like a Fed announcement day to get almost every media outlet to run headlines that attempt to tie the day’s market movement to the Fed’s rate decision. The problem in today’s case is that there wasn’t even anything remotely resembling a decision, nor did anyone expect there to be. Markets were effectively betting on a zero percent chance of a rate cut at this meeting, and that’s been the case for several weeks. Fed speakers had also been very clear in their shoulder shrugs during that time, saying that there are two big policy considerations in play right now, each arguing in the opposite direction. Specifically, the Fed has a mandate to “promote maximum employment,” which could also be viewed as “promote a strong economy,” and a mandate for “price stability,” which is fancy talk for the Fed’s inflation fighting role.  When Fed speakers have recently referred to those two mandates being in tension, they mean the potential drag on the economy from tariffs and tighter fiscal policy argues in favor of lower rates if it translates to higher unemployment and weaker economic data.  Contrast that to the potential increase in inflation due to tariffs, which argues in favor of higher rates. Simply put, there was nothing the Fed could do today but sit on its hands and wait to see which side of the mandate ended up having more compelling evidence, and nothing for Fed Chair Powell to do but reiterate that fact multiple times when almost every reporter asked a different version of the same question. 

Just as Underwhelming as Expected

No sense in trying to manufacture excitement out of something boring. Even before Fed speakers went into the customary blackout period 12 days ago, it was already abundantly clear that they were all on the same page–a page of uncertainty in an uncertain chapter of an uncertain book.  Nothing had changed in the past 12 days that would allow the Fed or Powell to be any less uncertain about which of the two competing forces on rates would win out in the coming weeks/months.  As such, there was nothing Powell could do but reiterate that fact 17 times for the 17 different versions of the same question. It’s no surprise bonds are heading out the door precisely in line with pre-Fed levels.

Market Movement Recap

09:15 AM Sideways to slightly weaker overnight with a modest bounce in early trading.  MBS up 1 tick (.03) and 10yr up less than 1bp at 4.305

02:05 PM 10yr yields are down 3.0bps on the day at 4.268 and MB are up 6 ticks (.19).

03:23 PM Some back and forth during press conference, but largely at pre-Fed levels.  MBS up just over an eighth and 10yr down 2bps at 4.278

Loan providers saw more frequent use of verification tools as well as shortened turnaround times from preapproval to application submission, Lenderlogix said.