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

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.

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.

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

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.

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

Underlying U.S. inflation eased for a fourth month on an annual basis in July, keeping the Federal Reserve on track to lower interest rates next month.

These things happen…  While it’s true that CPI is one of the two hardest-hitting economic reports (the other being the jobs report), it’s also true that the data needs to come in higher or lower than expected in order to see the movement.  This morning’s key line item, core month-over month CPI, was right in line with the forecast of 0.2.  Even then, we still saw some initial movement due to some of the underlying data although that move has now been erased with help from early stock market weakness (the “something else” in the chart below).

Today brought the release of important economic data with the power to cause a sharp increase or decrease in mortgage rates.  There are a wide variety of economic reports that guide investors as well as Fed policy (which in turns has an impact on investor decisions).  All of the above makes for movement in the bond market which, in turn, drives day to day changes in interest rates. Some reports are more relevant than others when it comes to their potential rate impact and today’s Consumer Price Index (CPI) has frequently caused the biggest swings on any given month.  August will not be one of those months as today’s installment was right in line with the market’s expectations, resulting in exceptionally tame market/rate movement (for a CPI day anyway). Bonds managed to improve modestly, resulting in the top tier conventional 30yr fixed rate index dipping back under 6.5% by a hair.   From here, other economic data can and will leave a mark, for better or worse.  Tomorrow morning’s Retail Sales data now becomes the biggest volatility risk for the present week.  But it’s not until the jobs report in early September and the next CPI report the following week that we’ll get back to top tier data.

Uncommonly Flat CPI Reaction

Over the past year, the average CPI day can be picked out on a chart of daily bond market movement because it is often the biggest candlestick (or bar on a bar chart) between the 10th and 15th of any given month.  This was not destined to be the case today.  The as-expected result was the crux of the problem.  Even when looking beyond the headline numbers, there were offsetting factors with the unrounded number being bond friendly and the shelter component making the opposite argument.  Bonds ended almost perfectly flat despite some 2-way volatility in the morning.

Econ Data / Events

Core M/M CPI

0.2 vs 0.2 f’cast, 0.1 prev
(unrounded, 0.165)

Core Y/Y CPI

3.2 vs 3.2 f’cast, 3.3 prev

Market Movement Recap

10:15 AM Initially slightly weaker after CPI, but bouncing back now.  MBS up 1 tick (.03) and 10yr down 2.1bps at 3.822

01:37 PM Off best levels, but still stronger.  MBS up 2 ticks (.06) and 10yr down 1.6bps at 3.826