Wednesday’s Market Movement Raises Stakes for Friday

There are times when the bond market seems not to care too terribly much what the ADP Employment report is saying.  There are other times when ADP has a surprisingly big impact.  Relative to the size of today’s beat, we arguably saw one of the surprisingly big reactions today.  It’s not that the move was huge, but rather, that a beat of 143k vs 120k f’cast isn’t really worth trading one way or the other normally.  It speaks to a market that’s on edge about a potentially reassuring NFP on Friday.  The default expectation is for more and more labor market slack to be showing up.  If it doesn’t, bonds are vulnerable to more selling.  If it does, the lower boundaries of the recent rate ranges are already well established by the pre-Fed trade.

Econ Data / Events

ADP Employment

143k vs 120k f’cast, 103k prev

Market Movement Recap

08:27 AM Weaker overnight and after ADP.  MBS down an eighth and 10yr up 5.4bps at 3.787

11:41 AM Bouncing back somewhat.  MBS down 3 ticks (.09) and 10yr up 5.9bps at 3.792 (previously as high as 3.817)

01:58 PM MBS nearly back to unchanged, down only 1 tick (0.03). 10yr still up 4.3bps at 3.776

03:43 PM Friendly bounce has run its course.  MBS down 3 ticks (.09).  10yr up 5.3bps at 3.786

The Fed’s been saying it for several months and the market has been trading it accordingly for just as long: the focus has clearly shifted away from inflation and toward the labor market.  The latest piece of evidence is this morning’s ADP employment report.  Despite coming in only modestly higher than forecast (143k vs 120k), bonds have sold off by more than a meaningless amount. The most obvious takeaway is that Friday’s jobs report is a big potential turning point for rates if it comes in much better or worse than expected. On a positive note, yields remain under last week’s highs and thus still technically in the sideways range associated with the end of the post-Fed correction.  

Mortgage rates moved higher today after an employment report suggested that Friday’s forthcoming Employment Situation (the BIG jobs report) might come in slightly better than expected.  The report in question, ADP Employment, is always released 2 days before the big jobs report and it’s designed to align with the key headline of that report: nonfarm payrolls.   ADP’s payroll count was only slightly higher than the market expected today, but that was enough for traders to sell bonds, thus pushing yields/rates higher.  Thankfully, mortgage-specific bonds performed better than the rest of the bond market, thus limiting the upward movement in mortgage rates.  Nonetheless, the average lender is back up to the highest levels since September 9th. While that is getting pretty close to a full 30 days, mortgage rates are still a far cry from the levels seen during the first few days of September.  Moreover, there hasn’t been a ton of movement after the 9th, so it didn’t take much of an increase to get us back to those levels.  The average lender has been in a narrow range of about 0.125% the entire time. All that having been said, the reaction to today’s ADP report suggests the market is very willing to have a big reaction to Friday’s jobs report.  It’s very true and very important to understand that there’s no way to know how the jobs report will come out until it is actually released.  The market has already adjusted to everything that can be known about the future.  All we know is that volatility potential is elevated significantly heading into the end of the week. 

Whether it was Richey May’s lock picking kit, Maxwell’s milk frother, Total Expert’s socks, or Byte’s locally made sweet treats, there was plenty of vendor schwag in Las Vegas at the ACUMA event, just as there is at many conferences. (Thank you to Lisa B. for passing along this article illustrating how the tchotchke market is an economic indicator!) Byte is known for helping local merchants, unlike much of the merchandise that comes from, say, China. Speaking of imports and trade, the Fed can only do so much when it comes to trying to control inflation, and roughly 50,000 International Longshoremen’s Association (ILA) members have begun a work stoppage this morning until negotiations are resolved with the United States Maritime Alliance, which represents ocean carriers. This means that operations across East and Gulf ports are on hold. This large-scale strike has stopped the flow of a variety of goods through ports from Maine to Texas. Depending on the length of the stoppage, this could result in shortages of certain products. (Today’s podcast is found here and this week’s is sponsored by Candor. Candor’s authentic Expert System AI has powered more than 2 million flawless, hands off underwrites. Every credit risk decision Candor makes is backed by a Warranty, eliminating repurchase worries. Hear an interview with Clever’s Jaime Seale on a survey showing that 50 percent more sellers would use an agent on their next home sale if they didn’t have to pay the buyer’s portion of the commission fee.)

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While the past 5 months have been well-stocked with victories for mortgage rates, the past week and a half brought a bit of a pull back.  Most of that upward momentum can be chalked up to rates rushing to get into position for the Fed’s rate cut on September 18th.  It’s actually quite a bit more complicated than that, but thankfully, the movement has been small enough that it doesn’t demand a detailed explanation. In not so many words, the entire bond market had some “refiguring” to do after Fed day, and that process was pretty good for the shortest-term rates and mildly inconvenient for longer-term rates like mortgages. While there was some uncertainty at times, last week now looks like it clearly marked the end of the reaction phase to the Fed’s policy shift.  That leaves the rate market to move on to watching the normal stuff: scheduled economic data and unscheduled surprises that are big enough to impact global financial markets.  Both came into play today. Interestingly enough, today’s economic data didn’t have a big impact on rates.  Instead, the market focused on headlines regarding missile strikes in the Middle East.  In general, escalating military conflict (if sufficiently alarming) tends to push stock prices and interest rates lower, as was the case this morning.   Mortgage rates fell back to last  Friday’s levels after yesterday saw the highest rates in several weeks.