The only thing constant is change. After 53 years, Southwest Airlines is ending its 100 percent open seating policy! (I don’t mind lining up.) People and companies have to adjust… Time waits for no one. What were concerts like in 1964, 60 years ago? Here’s an interesting chart that shows where the U.S. Government pegged interest rates through history, including 1964. (In the 4’s.) While we’re on interest rates, many clamor for lower rates, whether that means 6 or 5 or 4 percent is unclear. There’s a lot of talk about the Federal Reserve’s Open Market Committee lowering the fed funds target rates in September when the Fed meets. But lenders know that an interest rate cut might not translate into immediately lower mortgage rates. Ask your capital markets staff: The bond market is already pricing in rate cuts, so the simple act of the Fed cutting is not necessarily going to have a direct impact on mortgage rates. (Today’s podcast is found here and this week’s is sponsored by LoanCare, known for delivering superior customer experience as a mortgage subservicer through personalization and convenience, and supporting MSR investors with a focus on customer engagement, liquidity, and credit risk. Hear an interview with NJ Lenders’ Steve Grossman on coaching his sales staff to get the best out of them.) Lender and Broker Software, Products, and Services Deephaven Mortgage is excited to announce that it is hosting its own non-QM event, Non-QM Power Pulse, along with Anchor Loans on September 18th 8:30 am to 12:30 pm in Hollywood Beach, Florida! Deephaven is committed to support, educate and deliver resources to the entire real estate community. Chief Sales Officer at Deephaven Tom Davis, Managing Director of National Accounts at Deephaven Tyler Bohn and VP of Business Development at Anchor Loans Dave Gray join other industry experts to deliver educational panels focused on helping you increase your volume. In one day, you will gain the power to: Stay ahead of the competition, increase your volume and referral base, network with top Realtors, investors, and loan originators! You will also learn how to promote Ground Up Construction and Fix and Flip programs to investors. Register now and join us so that you can offer a full suite of investor loans for your clients to build their portfolios and differentiate yourself in the market. Register Now!

This week’s most important economic data was the PCE price index which is the gold standard of big picture inflation measurement. For those hoping to see rates drop, it was important for PCE to confirm the progress seen in the CPI data (the other major inflation index that came out 2 weeks ago).   Spoiler alert: PCE confirmed the progress, but there are a few nuances. Perhaps most importantly, this week’s PCE data covers the same time frame as the CPI data two weeks ago.  In other words, it’s not quite as awesome as 2 consecutive months of “mission accomplished” levels of inflation (which has now arguably been cemented for June), but it’s nonetheless an important milestone in the path toward rate cuts. What exactly does “mission accomplished” mean?  This simply refers to Fed’s 2% annual inflation target, typically tracked via Core PCE which excludes more volatile food and energy prices.  In order to hit 2%, monthly inflation readings need to average roughly .17%.  This time around, it was .182%–definitely in the historical range of on-target inflation from before the pandemic. While the chart above makes it look like victory has been achieved, the inflation target is technically an annual thing, so we need to see more months in the target zone before the year over year number falls into line. Even then, the Fed has clearly stated that the annual change doesn’t need to hit 2% as long as they’re confident that it will.  Prior to this week’s data, the average Fed member has expressed an increasing amount of said confidence.  It’s not thought to be enough for a rate cut at next week’s Fed meeting, but it’s widely believed to result in a September rate cut, as long as the data doesn’t do anything crazy between now and then.

After yesterday’s quarter over quarter core PCE price index came in 0.2% higher than expected, we knew today’s monthly PCE data would have to include higher numbers divided across the months of April, May, and June in some unknown proportion.  If April and May were not revised, it suggested an unrounded monthly core PCE of 0.37 today, which would have rounded to a 0.4% headline versus the 0.1% forecast.  But that would be very uncommon, so markets split the difference and figured the extra inflation would be spread more evenly across the quarter.  Forecasters who updated their predictions changed to 0.2% for the m/m core number, and that’s exactly what we got.
The more we drill down, the better the news gets.  After all, 0.2 is a rounded number.  The unrounded version was 0.182… even better!  Perhaps just as important was the fact that the housing component of the PCE data fell to its lowest level since it was first on the way up in 2021.

The following heat map shows another way to visualize the progress:

The main takeaway is really the same in that it shows significant cooling in what has been the most problematic sector.  It also serves to remind us that there are months like January that will continue to distort 6 month and 1 year metrics.  
Bottom line to all this: the market knew the previous 0.1% forecast for today’s core PCE was a long shot after yesterday.  That’s why we sold off yesterday instead of today.  Now that today’s PCE came out with what was probably the softest possible realization of yesterday’s warning, bonds are breathing a small sigh of relief, moving to the stronger end of this week’s range.

A group of 14 state attorneys general, led by Tennessee, joined the chorus of opposition to the Fannie Mae pilot to not require title insurance on certain refinances

But following the gross domestic product and personal consumption expenditures reports, Treasury yields and mortgage rates fell.

Moderating price growth and higher wages are leading to affordability relief, according to the Mortgage Bankers Association.

U.S. economic growth accelerated by more than forecast in the second quarter, illustrating demand is holding up under the weight of higher borrowing costs.

Third-party origination operations are also going to Mr. Cooper in the $1.4 billion deal, in which the seller cited interest in improving its capital position.

Lots of Competing Motivations Causing Volatility In a Narrow Range

Today marked an uptick in the importance of economic data for the week and it had obvious consequences for volatility.  Of particular importance was the higher reading in quarterly PCE prices.  Because this is the first look at Q2 data, it’s one of 4 days each year where the PCE component of the GDP data offers a sneak peek at the full PCE report that comes out the following morning.  the 2.9 vs 2.7 reading suggests there’s extra inflation that will be distributed between April, May, and June.  If June accounts for more than the other two months, tomorrow’s PCE index will be higher than expected, and thus bad for rates.  That accounts for some weakness this morning, but traders are also in the midst of adjusting their yield curve positioning which has resulted in big discrepancies between longer and shorter term rates this week.

Econ Data / Events

Jobless Claims

235k vs 238k f’cast, 245k prev

Durable Goods

-6.6 vs 0.3 f’cast, 0.1 prev

Nondefense ex-air Durable Goods

1.0 vs 0.2 f’cast, -0.9 prev 

GDP 

2.8 vs 2.7 f’cast

Core PCE Prices Q/Q

2.9 vs 2.7 f’cast

Market Movement Recap

08:56 AM Sharply stronger overnight but losing ground after data.  MBS still up 7 ticks (.22) and 10yr still down 5+ bps at 4.24.

11:51 AM Decent amount of volatility in the AM hours.  Slightly negative drift, but MBS still up 6 ticks (.19) and 10yr still down 6bps at 4.229

01:43 PM Generally weaker after the auction, with losses focused on the short end.  MBS still up an eighth.  10yr still down 3bps, but near highs of day at 4.258

Mortgage rates continue moving in very small steps from day to day–something that’s been the case since the Consumer Price Index (CPI) more than 2 weeks ago.  Unfortunately, more of those steps have been higher in the past week, and today is no exception for most lenders. This is counterintuitive to those who closely follow bonds markets and who understand that mortgage rate movement closely matches those underlying market movements.  Reason being: bonds are technically in stronger territory compared to yesterday.  Strength in the bond market almost always coincides with lower mortgage rates, but the timing of that strength can cause some inconsistencies.  For instance, bonds swooned yesterday afternoon and not every mortgage lender saw fit to raise rates in the middle of the business day in response.  Those lenders consequently had to adjust for both yesterday’s weakness and today’s strength in their latest rate offerings. Lenders who issued late day reprices yesterday were able to hold steady this morning or even offer slightly lower rates today. If all of that is a bit confusing, just consider that, despite several ups and downs over the past 48 hours, bonds are in weaker territory than they were yesterday morning during the time when lenders publish rate sheets.  Lenders either took their lumps yesterday afternoon or this morning.   As for motivations, the market is rapidly adjusting its preferences for different durations of bonds.  In other words, 2yr Treasury notes gained a ton of popularity over the past few days and even more since late June.  This is mostly a factor of the shift in the outlook for the Fed Funds Rate.  When traders make these adjustments, it can impact the bonds that more readily translate to mortgage rates.