Cannabis banking, the Durbin-Marshall credit card bill and executive compensation legislation could be on the agenda this fall, but banking regulators’ Basel III endgame proposal has made bipartisan compromise more complicated.

If you’re at all tuned in to economic and financial news, you’ve probably heard the the phrase “data dependent” more than a few times recently.  It refers to the outlook for the Fed’s monetary policy and interest rates in general.  If the data shows less growth and inflation, the Fed will set friendlier policies and rates will move lower.  If the data is stronger and inflation is higher, rates will remain high or move higher. Today brought the week’s only true top tier economic report.  You may have never heard of the ISM Non-Manufacturing Index, but it’s the most closely watched version of a class of economic indices (PMIs or “purchasing managers indices) that are highly regarded by financial markets.  All that to say, if the ISM Non-Manufacturing PMI comes in much higher or lower than expected, the market tends to react. Today’s version was higher than expected across the board (there are multiple sub-indices that factor into the overall headline).  Of particular note, the “prices paid” index rose for the 2nd straight month and is now back in line with the highest levels since March/April.   The market isn’t too worried about the outright levels of that price index, but the trajectory matters.  Today’s increase gives the impression of the first legitimate bounce in service sector inflation since the price index began a serious downtrend in mid-2022. Who cares?  Mortgage rates!  Rates are high due to inflation.  If it looks like inflation is bouncing, rates will have a hard time moving lower.  Today’s reaction was fairly small in the bigger picture, but it nonetheless took the average lender back up to the highest rates in more than a week.  

Straightforward sell-off

Bonds managed to begin the day sideways to slightly stronger, although the strength was more apparent in the longer end of the yield curve.  Perhaps market participants could sense the impending curve flattening bias in today’s big ticket econ data.  ISM Services beat the consensus and the inflation component rose for the second straight month, reaching the highest levels since March.  The implications for core services inflation go without saying and the market traded it as such with a obvious bump to implied Fed Funds rates for 2024 contracts.  The longer end of the curve fared better but still lost a bit of ground.  Corporate bond issuance remains a background problem.  Technicals may see some increased focus for the rest of the week without much by way of meaningful data until next week’s CPI.

Econ Data / Events

Trade Gap

-65b vs -68b f’cast, -63.7b prev

S&P PMI

50.2 vs 50.4 f’cast, 52.0 prev

ISM Services PMI

54.5 vs 52.5 f’cast, 52.7 prev

Market Movement Recap

09:36 AM Sideways to slightly stronger overnight and little-changed so far during domestic trading.  10yr down 2bps at 4.244.  MBS up 1 tick (0.03)

10:26 AM Weaker after ISM data.  MBS down an eight to a quarter point.  10yr up 2bps at 4.284.

03:56 PM Essentially sideways since 11am.  10yr up 3.6bps at 4.30.  MBS down 5 ticks (.19).

This morning I head to Dallas, Texas, where, if you ask Redfin, prices are up 5 percent for the year. Or Zillow will tell you prices are down 2 percent. Can’t we all agree on something? Certainly, we can all agree that inflation is simply too many dollars chasing too few goods. How about when too many houses are chasing too few insurance companies? No insurance company wants to be the last one standing. (Today’s “Mortgage Matters: The Weekly Roundup” at 11AM PT, 2PM ET, focuses on how LOs and brokers are dealing with the homeowners insurance nightmare.) In California, home to plenty of insurance companies dropping insuring homes, the Insurance Commissioner is an elected position. Ricardo Lara doesn’t want to lose his job, so doesn’t allow insurance companies to raise their premiums to compensate for risk. So, they drop out. “With the average premium priced over $1,400, some homeowners are opting to drop home insurance altogether. But this decision comes with some serious risks…” (Today’s podcast can be found here and this week’s is sponsored by LoanCare, a Fidelity National Financial (NYSE: FNF) division and award-winning developer of the most sophisticated mortgage servicing portfolio management tool, LoanCare Analytics, built to support MSR investors with a focus on customer engagement, liquidity, and credit risk. Hear an interview with MAXEX’s Henry Broeksmit on youth in the mortgage industry and career paths out of college.) Lender and Broker Products, Programs, and Services

It’s not as if the bond market magically knew that today’s non-manufacturing PMIs would come in hotter than expected, but they were clearly trading defensively to begin the holiday-shortened week.  That defensiveness is proving warranted after the ISM Services PMI jumped to 54.5 vs 52.5 forecasts and a previous reading of 52.7.  A noticeable uptick in the “prices paid” component surely doesn’t help the case for service sector inflation. Thus the day begins with additional weakness–especially in the shorter end of the yield curve as traders price in a higher Fed rate trajectory over the longer term.
In other words, the battle over the Fed outlook is taking place most noticeably in the more distant meeting months.  Fed Funds Futures for December barely budged on the ISM data, but June’s meeting popped about 5bps instantly.

Further to the point of the market’s reaction being focused on Fed implications, stocks and bonds did their quintessential mirror image trade (the one we always see when the entire market is reacting to changes in the Fed outlook).

A powerful hurricane and an approaching three-day weekend may have offset the impact of an improvement in interest rates during the week ended September 1. The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of mortgage loan application volume, failed to extend its first increase since mid-July into a second week. The Index decreased 2.9 percent on a seasonally adjusted basis and 5.0 percent before adjustment.    The Refinance Index decreased 5 percent from the previous week and was 30 percent lower than the same week one year ago. The refinance share of mortgage activity dipped to 30.0 percent of total applications from 30.1 percent. [refiappschart] The Purchase Index was down 2.0 percent and 5.0 percent on seasonally adjusted and unadjusted bases compared to the previous week. It was 28 percent lower than the same week one year ago. [purchaseappschart] “Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates. Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed mortgage rate decreased to 7.21 percent last week, but rates remained more than a full percentage point higher than a year ago, despite mixed data on the health of the economy and signs of a cooling job market. The refinance index dropped to its lowest level since January 2023, driven by a 6 percent decline in conventional refinances.”  

Interoperability does remain a potential issue, not just between the lenders and the merged technology companies, but with other vendors who do business with them as well.

The Federal Reserve has now offloaded about $1 trillion of its bond holdings since it began working down its bloated balance sheet last year, with no sign of the kinds of strains in financial markets that spooked policymakers the last time they oversaw such a program.

The FDIC is launching joint ventures to market $33 billion of commercial real estate loans from the failed Signature Bank, prioritizing its statutory obligation to preserve low-income housing availability.

The Department of Justice is recommending a sentence of 12 months behind bars for Carrie Tolstedt, a former Wells executive who has pleaded guilty to obstructing a bank examination. That’s harsher than the recommendation of the U.S. Probation Office.