Yesterday’s Losses Easily Erased By Data

Wednesday’s bond market losses rained on Tuesday’s post-CPI parade.  Justification was adequate, with Retail Sales coming in 0.2 higher than expected, but the implications for the near future were uncertain.  Were bonds only reacting to the data or was the CPI rally overdone to some small extent?  Today’s session helped answer those questions.  All it took was a modest miss in Jobless Claims and a few other 2nd tier reports for bonds to fully erase Wednesday’s losses.

Econ Data / Events

Jobless Claims

231k vs 220k f’cast, 218k prev

Continued Claims

1865k vs 1847k f’cast, 1833k prev

Philly Fed Index

-5.9 vs -9.0 f’cast/prev

Philly Fed Prices Paid

14.8 vs 23.1 prev

Industrial Production

-0.6 vs -0.3 f’cast, +0.1 prev

Market Movement Recap

08:47 AM Slightly stronger overnight with additional gains after AM econ data.  10yr down 8bps at 4.457.  MBS up just over a quarter point, but closer to 3/8ths after adjusting for illiquidity.

11:26 AM Best levels of the day about an hour ago, but giving up ground since then.  MBS up 6 ticks (.19) before accounting for illiquidity (8-10 ticks otherwise).  10yr yield down 7.2bps at 4.465.

02:14 PM Flat near best levels.  MBS up 14 ticks (.44) and 10yr down 8.8bps at 4.449.

03:20 PM No change from last update.  10s hit the 3pm close at the exact same 4.445 level as Wednesday.  MBS still up 14 ticks.

With yesterday’s Retail Sales data in the rearview, the base case between now and the first week of December is for more moderate volatility in a relatively flat range.  Nothing about today’s trading is arguing for a different take.  Econ data was generally supportive, so today’s range-bound volatility is pushing yields back toward the floor of this week’s range.
To be clear, the “base case” is not a prediction.  It’s merely the least surprising path for rates in the absence of any legitimate surprises.  An exogenous shock or a highly consequential piece of news can certainly do what those things always do.  The point is that if we don’t see any such surprises, the inbound economic data would have to be quite far from forecasts to coax yields out of the current range.
What is the current range?  There are a few different cases to be made.  On the bearish side, the recentness of the 4.70 ceiling (3 days ago) means it is worth considering.  On the bullish side, the 4.34% ceiling that existed before the September break-out isn’t a crazy low range target given the shift in Fed verbiage, economic data, and even the Treasury issuance outlook.
Amid those extremes, the most central range would be just over 4.4 on the low end and 4.55 on the high end.  It’s rare to see a range that narrow follow a level of volatility seen in recent weeks, but that’s why it’s the base case and not a prediction. Regardless of the yields in question, the theme is that bonds are cooling back down after a big scare in late October.  

The National Association of Homebuilders and Wells Fargo releases the results of a survey of NAHB members each month regarding the health of the homebuilding sector.  While officially referred to as the Housing Market Index (or HMI), the headline number is essentially “builder confidence.” After rising steadily from the end of 2022 through July, confidence has been in a tailspin across all categories.  Viewed against the backdrop of mortgage rates, it’s impossible to miss the general symmetry between higher rates and lower confidence. As rising rates gathered steam in the summer months it’s not a huge surprise to see a reversal in the HMI. Now in the most recent report (the one released today), builders were responding to the survey just as rates were flirting with 8%, but before this week’s CPI helped get us more than halfway back to 7%.   By no means can we conclude that a few weeks of stellar rate improvements will be enough to turn builders’ frowns upside down, but it’s safer to expect such things if the rate trend continues.  The point for today is that this particular survey comes at just about the worst possible time for a data series that has recently been almost exclusively a function of rates.

“Every disaster movie starts with the government ignoring a scientist.” Vendors and lenders can’t ignore red ink. Here in Kansas City, one of the discussion topics is how relationships are important during these days when the balance sheets of many lenders and vendors don’t look so great after, for many companies, several quarters of losses. How much pain do some owners want? Balance sheets were plump after 2020 and 2021, and warehouse banks and investor counterparties continue to do business with companies that are losing money based on those balance sheets along with the servicing income. Now? The MBA’s oft-quoted Marina Walsh, VP of Industry Analysis, reported, “Independent mortgage banks and mortgage subsidiaries of chartered banks reported a pre-tax net loss of $1,015 on each loan they originated in the third quarter of 2023, an increase from the reported loss of $534 per loan in the second quarter of 2023. (Today’s podcast can be found here, sponsored by LoanCare, the mortgage subservicer known for delivering superior customer experience through personalization and convenience. Its award-winning portfolio management tool, LoanCare Analytics, supports MSR investors with a focus on customer engagement, liquidity, and credit risk.) Lender and Broker Software, Products, and Services Plug-n-play your way to better relationship marketing with Velma, an effortlessly simple CRM tailor-made for smaller lenders, banks, and credit unions. Say goodbye to expensive, complex systems. Velma delivers budget-friendly marketing automation solutions featuring zero implementation fees and seamless, hassle-free setup. With hyper-personalized engagement, effortless efficiency, and a proven track record with over 40,000 mortgage professionals since 2007, Velma simplifies your journey, supercharges your marketing, and keeps your loan officers doing what they do best. Join the Velma revolution today and transform your lending business!

With a scarcity of listings driving high home prices, both repeat and new purchasers are putting the most money down in decades, the report found.

Relationships with brokers will be terminated on Dec. 6, but company officials stressed there would be no impact to its loan servicing or other mortgage channels.

Because the measure of the insurance fund’s soundness remained well above its target, trade groups asked whether the cost of coverage could be further reduced.

Analysts have been debating the impact on household finances and the economy as Americans resume student loan payments. There’s already a squeeze from higher interest rates, which are expected to slow consumer spending and economic growth.

The departures of David Benson and Jeffrey Hayward means decades of internal experience are leaving the company, said David Stevens.

If you had to script out the most likely course of events after Tuesday’s big post-CPI bond rally, the safest expectation would be for a token pull-back that helps consolidate and solidify a majority of the gains.  In order for that baseline assumption to pan out, you’d need this morning’s data to come in neutral to slightly stronger and with 2 beats (retail sales and Empire State) and one miss (PPI), that’s exactly what we have.
All that having been said, let’s not give too much credit to PPI or Empire State as they pale in comparison to Retail Sales.  The latter is the reason for this morning’s moderate weakness, if we could only choose one.  We could also consider that the Empire State manufacturing data is the most recent (November data vs October for Retail Sales and PPI) and also the most bullish in terms of the result versus the forecast.
The most immediate implication is a strange combination of a concern and a victory as yields bounce at the 4.43 technical level in fairly obvious fashion.  Based on overnight trading, markets were already leaning in a bouncy direction before the data.

So why a victory?  Rate bulls, please be patient…  We don’t want to do the big rally all at once.  We need periodic consolidation  and current yields–even after this morning’s weakness–would make for the 2nd best closing level in more than 2 months.  When this party is officially underway, we will be seeing a clear move through the gap that currently exists between 2022’s high yields and the most recent lows.