We’ve been anticipating this week of data for the past 3 weeks and it has been delivering on the promise of increased motivation for the bond market.  To make matters better, that motivation has been almost exclusively toward lower rates.  Today is the first day without any top tier econ data and coincidentally the first day without a decisive rally in bonds.  That said, there’s no decisive selling either.  It is shaping up to serve as a very logical day of consolidation ahead of tomorrow’s jobs report which in turn might not pack a normal punch with CPI coming up next Wednesday.
This morning’s only big ticket event was actually the European Central Bank (ECB) announcement, but it hasn’t produced a notable reaction–especially not in the US bond market.  The ECB cut rates for the first time since 2019, which was not only 100% expected, but almost 100% telegraphed by the ECB.  As such, markets focused on the subtly
There was a momentary spat of volatility after the 8:30am Jobless Claims data, but it was quickly traded out.  Yields continue holding the range established by said spat.  There are no additional economic reports for today.  

Ginnie Mae just approved some flexibilities for extended term MBS. Here’s what else is on its roadmap, according to Sam Valverde, the agency’s acting president.

The deal is expected to open up “substantial funding capacity” for Los Angeles-based BARH Dunmore, which launched in 2021.

The Consumer Financial Protection Bureau issued a final rule pursuant to its broader open banking proposal Wednesday that would require standard-setting bodies to include public interest consumer groups and others to receive bureau recognition.

The company foresees a dampened mortgage originations market through 2026, as last year’s trends continue to have an impact on housing.

Staffing cuts affected employees in the reverse-mortgage lender’s retail and corporate units, the company confirmed.

The phrase “data dependent” is ingrained in the current bond market psychology for good reason.  Weaker trends in economic data will reliably cause the Fed to cut rates when the time comes.  This is particularly true for inflation-related data, but other reports still matter.  One of those reports came out this morning, but things didn’t go according to the data dependent script–at least not at first glance. The Institute for Supply Management (ISM) publishes a monthly index on the health of the services sector called the PMI (purchasing managers index).  Apart from the highest of the top tier economic reports, ISM PMIs are some of the most relevant considerations when it comes to data that moves the rate market. Today’s Services PMI was HIGHER than expected, and not by a small margin.  This is something that would normally be  bad for rates .  Indeed, that was the bond market’s initial reaction, but the first move quickly gave way to a rebound that resulted in even lower rates by the end of the day.  As for the rationale, it could have something to do with a component of the report that showed slightly lower price pressures versus last month.  Combine that with the same message in ISM’s manufacturing PMI earlier this week, and the market could be hoping that next week’s all important Consumer Price Index (CPI) sings a similar tune.   The average mortgage lender moved one step closer to the lowest levels since early April, but there still a few days in mid May that were microscopically better.  

Counterintuitive Reaction to Data, But We’re Not Upset

The bond market did not stick to its usual script today.  An important piece of economic data (ISM Services PMI) came out above the median forecast by an amount that is historically significant–an amount that would almost always result in immediate bond market weakness of at least several bps in terms of 10yr Treasury yields.  Unsurprisingly, that happened right away, but then something else happened.  Bonds quickly erased the losses and moved to the best levels of the day (where they stayed for the rest of the trading day). It’s a bit of a stretch to give credit to the components of the data, but it helps. Other explanations include anticipation for more palatable inflation data next week and, in the shorter-term, tame job creation in this Friday’s data.  

Econ Data / Events

ADP Employment

152k vs 175k f’cast, 192k prev

Market Movement Recap

08:17 AM Basically unchanged overnight and little reaction to ADP jobs.  MBS unchanged and 10yr down less than 1bp at 4.319

10:38 AM Volatility after ISM data with a brief pop to 4.358 in 10yr yields, but now back down 1.5bps on the day to 4.31+.  MBS back up 1 tick (.03) after being down 2 ticks (.06) at the lows.

11:24 AM Best levels of the day now with 10yr down 3.6bps at 4.291 and MBS up 5 ticks (.16).

02:25 PM Fairly flat near best levels.  Trading levels right in line as the last update.

ISM produces two PMIs.  Both of them have a strong track record of inspiring market movement with today’s service sector version being the bigger deal on average.  It would be alarming, then, to know that it came in at 53.8 versus a median forecast of 50.8, and unsurprising to see 10yr yields spike a quick 5bps in response. That’s exactly what happened, but that’s not ALL that happened.  After about 15 minutes of selling, bonds turned around and went right back to pre-data levels, as if to say “we see this stronger economic headline, but we’re not convinced that we need to be anywhere but in position for generally weaker economic data.”  It will be a much more impressive trick if the bond market were able to pull off similar defiance in the face of NFP this Friday or next week’s CPI, but for today, we can’t object.

Interest rates, along with the distraction of a three-day weekend, further slowed the mortgage market last week. Tho Mortgage Bankers Association (MBA) reports that its Market Composite Index, a measure of mortgage loan application volume, decreased 5.2 percent on a seasonally adjusted basis from one week earlier and 16.0 percent compared with the previous week. The results include an adjustment for the Memorial Day holiday. The Refinance Index decreased 7.0 percent and was 5.0 percent higher than the same week one year ago. The refinance share of mortgage activity decreased to 31.1 percent of total applications from 31.3 percent the previous week. [refiappschart] The seasonally adjusted Purchase Index decreased 4.0 percent from one week earlier. The unadjusted Purchase Index was also down 16.0 percent compared with the previous week and 13.0 percent lower than the same week one year ago.+ [purchaseappschart] “Mortgage rates moved slightly higher last week, with the 30-year conforming rate reaching 7.07 percent – its highest level since early May – despite incoming data indicating somewhat slower economic growth,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “After adjusting for the Memorial Day holiday, both purchase and refinance application volumes were down, with purchase activity specifically 13 percent below last year’s level.” Added Fratantoni, “Government purchase volume was down less, helped by growth in VA applications. The market is relying on first-time homebuyer demand, and many first-time buyers do use government lending programs.”