The Federal Reserve has allowed more than $1 trillion of assets to roll off its balance sheet. Chair Jerome Powell says he doesn’t believe reserves in the banking system are nearing a level that would cause the Fed to slow down or stop.

Falling interest rates are behind a recent spike in government-backed lending as well as refinances, according to the Mortgage Bankers Association.

Today brought the scheduled Fed policy announcement that we’ve been waiting for and mortgage rates plummeted as a result.  So does that mean the Fed cut rates?  No…  The Fed kept its policy rate perfectly unchanged, as expected. In fact, it was unlikely that the Fed would have said anything significant in the actual policy announcement itself (although they did add a single word that hinted at the prevailing rate hike cycle being over).  Instead, today’s focus was on the dot plot which the Fed uses to convey its outlook for the Fed Funds Rate 4 times per year. September’s dot plot was bad for rates, but economic data and Fed speeches since then have led investors to expect today’s dot plot to be much more friendly.  That ended up being exactly what happened with September’s unfriendly changes being completely erased. 30 minutes later, Fed Chair Powell held a press conference in which he said nothing to object to the rate market’s very strong reaction.  In other words, he saw the big drop in rates (as implied by bond trading levels) and didn’t have a problem with it.  The market viewed this as a further endorsement of the momentum. When all was said and done the average 30yr fixed rate for a top tier scenario was nearly 0.30% lower than yesterday afternoon–one of the biggest single day drops on record.  Our rate index is now well into the high 6% range.

Huge Rally as Dots Deliver and Powell Stays Out of The Way

It may have seemed that we were paying too much attention to today’s dot plot on the approach, but hindsight suggests it could not have been overdone.  Rates plummeted as the dots revealed that September’s big revision was completely erased (in Sept, Fed members priced in 50bps of “higher for longer in 2024”).  After the dots, some market watchers worried that Powell would push back on the rally in order to temper the volatility.  He did not.  He simply said the same things he’s been saying.  Hikes are likely done unless data manages to surprise in an inflationary way.  Bonds rejoice across the curve.

Econ Data / Events

Core PPI m/m

0.0 vs 0.2 f’cast

Market Movement Recap

09:46 AM Gradually stronger overnight with modest additional gains after PPI data.  MBS up 5 ticks (.16) and 10yr down 4bps at 4.17.

10:24 AM Some illiquidity in MBS, currently up 3 ticks (.09), but briefly showing as being down more than an eighth.  10yr down 3.6bps at 4.174

01:35 PM A bit weaker ahead of the Fed.  MBS still up 1 tick (0.03) but down 3-4 ticks from highs.  10yr down 4.4bps on the day at 4.166.

02:07 PM First move is stronger after the DOTS.  10yr down 11bps at 4.10.  MBS up half a point in 5.5 coupons.

03:36 PM Mostly holding massive gains seen during Powell’s press conference.  10yr down 18bps at 4.03.  MBS up nearly a point in 5.5 coupons and nearly 5/8ths in 6.0 coupons.

While mortgage assumptions are on the rise, so too are complaints leveled against mortgage servicers for how they handle the loans. A common refrain is that the companies are moving too slowly.

The government is moving forward with a catalog of pre-approved home designs to reduce the cost and time it takes to build housing. The idea dates back to the 1940s when thousands of soldiers returned from the Second World War and needed a place to live.

More borrowers are taking action but lack good information, Fannie Mae finds. Meanwhile, premiums are up yet insurers struggle to profit, a separate KBRA study shows.

Decreasing availability of jumbo and non-QM products accounted for most of November’s pullback, as other types of loan offerings saw minimal changes, the Mortgage Bankers Association said.

U.S. consumer prices picked up in November, reinforcing the Federal Reserve’s resolve to keep interest rates elevated in the near term.

When it comes to interest rates reacting to scheduled economic reports, the magnitude of the reaction is generally correlated with the extent to which the data comes out better or worse than expected.  Said more simply, the stronger the economic data is relative to expectations, the more rates tend to rise.  The weaker the data is, the more rates tend to fall. Of course there’s a third scenario where the data comes out almost perfectly in line with the median economic forecast.  In those cases, there can still be subtleties in certain economic reports that tip the scales in one direction or the other.  Then again, sometimes those subtleties balance each other out, or they simply fail to catch the market’s attention. In today’s case, rates were waiting on the results of the Consumer Price Index (CPI)–the most widely traded inflation report on any given month.  The top line numbers definitely threaded the needle with core inflation hitting 0.3% versus a median forecast of 0.3% in month-over-month terms.  That was the most important number of the day. The internal numbers weren’t perfectly balanced and they resulted in some upward pressure on rates, but it was only really detectable in the underlying bond market.  Reason being: bonds were stronger overnight.  Mortgage lenders would have been in a position to offer lower rates this morning, but due to the modestly negative impact from the CPI components, the bond market ended up right in line with yesterday’s latest levels by the time mortgage rates came out for the day.