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.

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

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. 

The penalty by the Office of the Comptroller of the Currency is a major setback for the San Francisco bank, which was freed from a separate anti-money-laundering order in 2021. Its stock price fell sharply after the news broke.

Rising property values continue to buffer mortgagors against negative equity situations, Corelogic said.

A combination of buy and sell-side issues led Mr. Cooper to slow down its mortgage servicing rights activity but executives may have a different view next year.

While large institutions might rank low in customer satisfaction, the institutions that can build up client trust are also likely to see consumers more likely to share personal data, a leading analyst said.

A letter led by Sen. Elizabeth Warren, D-Mass., urges bank regulators to crack down on banking as a service, while another led by Sen. Jack Reed, D-R.I., asks that the Consumer Financial Protection Bureau more closely monitor buy now/pay later companies.

Modest Resistance, But No Big Bad Correction

Unless Friday’s Consumer Sentiment data manages to surprise in some completely unprecedented way, bonds have made it through the week of economic reports and Treasury auctions without looking any worse for the wear.  Thursday saw a small amount of ground conceded, but not enough to move yields back up in to last week’s range.  The initial reaction to the 8:30am data was actually slightly positive for bonds.  Selling came later, suggesting sellers had other motivations.  The recovery in the afternoon was concentrated in the shorter end of the yield curve following an article by WSJ’s Timiraos discussing a 25bp vs 50bp Fed rate cut.

Econ Data / Events

Jobless Claims

230k vs 230k f’cast, 227k prev

Core PPI MM

0.3 vs 0.2 f’cast, -0.2 prev

Core PPY YY

2.4 vs 2.5 f’cast, 2.4 prev

Market Movement Recap

08:54 AM Roughly unchanged overnight and a hair stronger after data.  MBS up 2 ticks (.06) and 10yr down 0.7bps at 3.647

01:13 PM weakest levels just after noon, but off the lows now.  MBS down an eighth and 10yr up 4.2 bps at 3.696

02:55 PM MBS now down only 1 tick (.03) and 10yr up 2.7bps at 3.681

Thursday brings this week’s last opportunity for the market to react to moderately important economic data before next week’s Fed announcement.  So far, it looks like fireworks are not on the menu.  Heavy lifting was left to only two reports: Jobless Claims and PPI.  Neither are true top tier reports, but both are capable of causing a reaction.  Today’s installments didn’t swing for the fences.  Claims were flat and PPI was a mixed bag with a higher reading for August offset by a bigger downward revision to July. The market reaction was stronger at first, but is turning weaker as the morning progresses.  The bigger issue is that this makes the bigger-picture rally look a bit tired, or at least like it’s consolidating ahead of next week’s unavoidable breakout.