Econ Data Keeps Bonds in Check

Looking solely at the end of day trading levels in the bond market, we could conclude that we are once again deprived of any meaningful motivations for momentum.  That’s partially true in the sense that today’s events were not “top tier.”  Nonetheless, we can still make a case for some relevance.  After all, bonds were definitely stronger ahead of this morning’s data.  The initial weakness could be coincidental, but the 9:45am reaction to the PMI data was fairly clear in terms of volume and volatility.  That’s interesting considering it was mostly in line with forecasts.  Some analysts suggested the focus was on the “confidence” metric at a 22 month high in the services sector and that’s a fair take if we’re trying to justify the reaction.  In the bigger picture, we’re waiting on next Friday’s PCE data (more like waiting on Monday since the bond market is closed next Friday).

Econ Data / Events

Philly Fed Index

3.2 vs -2.3 f’cast, 5.2 prev

Philly Fed Prices

3.7 vs 16.6 prev

Jobless Claims

210k vs 215k f’cast, 212k prev

Continued Claims

1807k vs 1803k prev

S&P Services PMI

51.7 vs 52.0 f’cast, 52.3 prev

S&P Manufacturing PMI

52.5 vs 51.7 f’cast, 52.2 prev

Existing Home Sales

4.38m vs 3.94m f’cast, 4.0m prev

Market Movement Recap

08:41 AM After econ data, 10yr up to 4.247 (still down 3 bps on the day). MBS still up 5 ticks (.16) on the day.

09:58 AM MBS are now down 2 ticks (.06) on the day and 10yr yields are unchanged at 4.277.

01:40 PM Flat since 10am.  MBS unchanged and 10yr half a bp higher at 4.281

03:45 PM Still flat near unchanged levels.  MBS up 1 tick (.03) and 10yr unchanged at 4.277.

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Surprisingly Calm Reaction to Surprisingly Dovish Fed

With so much apparently at stake heading into today’s Fed events, the reality ended up being somewhat underwhelming.  At least it was underwhelming in a good way for the bond market and rates.  The key revelation was a Fed dot plot (individual projections for the Fed Funds Rate) that showed the exact same median rate at the end of 2024 as seen in the last dot plot (3 rate cuts still penciled in this year).  Bonds cheered the news at first, but then got defensive ahead of Powell’s press conference.  Powell navigated questions without prompting any more panic–essentially convincing investors that the Fed was approaching incoming data with with a certain level of optimism regarding inflation returning to the late 2023 trend (as opposed to the early 2024 trend of higher readings). Bonds ended up basically threading the needle with modest gains by the end of the day.

Market Movement Recap

09:38 AM Initially stronger overnight on EU inflation data, but steadily rising since then.  10yr unchanged at 4.293.  MBS down 1 tick (.03)

01:25 PM Slightly stronger ahead of Fed.  MBS up an eighth.  10yr down 1.8bps at 4.275

02:32 PM 2 way reaction after Fed announcement.  Now slightly weaker heading into the press conference.  10yr up 1.1bps at 4.304.  MBS still up an eighth of a point. 

03:25 PM Bonds settling down in slightly stronger territory with MBS up 7 ticks (.23) and 10yr yields down 1.6bps at 4.277. 

The rate market was intently focused on today’s announcement from the Federal Reserve.  While many news headlines emphasize the Fed “holding rates steady,” but that’s not what the bond market was focused on.  Because mortgage rates are determined by the bond market, that meant they were free to move even though the Fed stood still. Markets were most interested in the Fed’s projections for future rate cuts.  In not so many words, those projections retained the Fed’s previous expectation of 3 rate cuts by the end of this year, albeit by a smaller margin than the last round of projections in December. This was a bit more hopeful than markets expected. As such, bonds improved and mortgage rates fell.   The catch is that the improvement wasn’t very big, so the average mortgage lender is still in noticeably higher territory compared to the beginning of last week.

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