Explaining Today’s Inexplicable Weakness

If the bond market is well understood to be heavily “data dependent,” and if today’s big ticket economic data didn’t come in stronger than expected, why did the bond market lose a fair amount of ground?  A fair question, to be sure and in this case one that isn’t easily answered by making excuses for the econ data (i.e. by calling attention to the month-over-month increase in ISM and ISM prices, or saying “yeah, but JOLTS is still elevated!”). Instead, it makes more sense to focus on “new month” tradeflows and apprehension over the upcoming data and event in the 2nd half of the week (Treasury refunding announcement + bigger-ticket econ data).

Econ Data / Events

ISM manufacturing

46.4 vs 46.8 f’cast, 46.0 prev
prices 42.6 vs 42.8 f’cast, 41.8 prev

Job Openings

9.582m vs 9.610m f’cast, 9.616m prev

Market Movement Recap

09:22 AM Modestly weaker overnight with more selling at 8:20am. Stabilizing now.  MBS down 1 tick (0.03) officially, but more like a quarter point from y’day’s latest liquid levels.  10yr up 5.4bps at 4.021.

10:17 AM More selling despite weaker data (not weak enough, apparently). 10yr up 7.4bps at 4.04.  MBS down half a point.

03:20 PM Sideways at weaker levels since the last update.  MBS down 14 ticks (.44).  10yr up 7.6bps at 4.043

The 8:20am CME Open is such a relevant event for the bond market sometimes that it has its own entry in our knowledge base.  On any given morning, it’s possible to see traders lined up (figuratively) to buy or sell as soon as 8:20am hits. 
This is all the more likely on the first and final days of any given week or month. Here on August 1st, a small but noticeable majority of traders were lined up to sell.  The spike in volume and selling pressure at 8:20am were obvious and they added to what had been modest weakness overnight.  

The rest of the session is likely to take its cues from the 10am econ data.

But the 25 percentage point quarter-to-quarter gain does not change the fact that existing homes for sale remain scarce, the TrustEngine report found.

The Federal Reserve said that banks reported tighter standards and continued weak demand for loans in the second quarter, extending a trend that began before recent stresses in the banking sector emerged.

The sector is well-positioned for further volume growth into next year, analysts led by Anthony Pettinari said in a note to clients Monday.

But mortgage numbers remain historically very low and fall short of pre-pandemic levels, according to VantageScore’s latest monthly report.

The Department of Housing and Urban Development would permanently allow servicers to use online and remote communications to establish borrower contact, as they did during the pandemic.

Uneventful Start to What May be an Eventful Week

When there are multiple examples of important events that can cause bond market volatility in any given week but that week begins without much volatility, the analysis writes itself.  The words may vary, but the underlying message is one of “calm before the storm.”  And because the storm involves multiple economic reports that stand some chance of offsetting their directional implications, it’s safer to say “calm before the potential storm.”  The most notable volatility today was driven by trades that existed due to month-end positional needs rather than a reaction to data/events.  Thus, the biggest moves were seen at 9:30am and 3pm, but ultimately didn’t leave trading levels far from Friday’s latest.

Econ Data / Events

Chicago PMI

42.8 vs 43.3 f’cast, 41.5 prev

Market Movement Recap

09:45 AM No major reaction to data.  10yr up less than 1bp at 4.02.  MBS down 2 ticks (.06).

12:51 PM modest additional gains with 10yr down 1.7bps at 3.996.  MBS up an eighth.

02:21 PM Leveled off in PM and slipping slightly.  MBS up 3 ticks (.09) and 10yr down 1bp at 4.003.

02:57 PM Giving up slightly more ground now.  MBS unchanged (down just over an eighth from highs) and 10yr also unchanged at 3.957.

After the initial recovery from the Great Financial Crisis, and again after the Fed began to taper asset purchases at the end of 2013, there were two dark ages for the role of economic data. These both lasted for years and involved low levels of correlation between data and market movement. Another dark age followed the outbreak of the pandemic.
In all cases, the dark ages were caused by a predictable policy stance from the Fed with a stable outlook well into the near-term future. In all cases, data reconnected with markets when the Fed’s policy stance was in flux, as has increasingly been the case as we approach the terminal rate.
In simpler terms, the connection between econ data and the bond market has been growing stronger and stronger in 2023 as the Fed comes out of cruise control on rate hikes.  Last week’s hike represents the best chance yet that we’ve hit the terminal rate.  Whether or not that chance is “high” in outright terms will depend on data between now and the next Fed meeting. 
This week contains a meaningful portion of the most relevant data.  If it’s unified in one direction or the other, bonds are capable of some large, fast movement.  In terms of 10yr yields, nothing inside a range of 3.75 to to 4.15 would be a surprise.  Mixed data would likely result in a much calmer performance.

As the new week begins, mortgage rates are almost perfectly in line with those seen on Friday afternoon.  Putting that in context, last Thursday and Friday marked the highest rates in weeks although Friday was quite a bit better.  In both cases and again today, the average lender is just over 7% for a top tier conventional 30yr fixed scenario. Last Thursday’s drama stemmed from strong economic data.  That sort of data is a key consideration for rate movement in general, but especially right now.  The Fed is scrutinizing data to determine whether it’s time to hold rates steady after hiking at the fastest pace since the early 80s.   While the Fed Funds Rate doesn’t dictate mortgage rates, the  expectations for future movement in the Fed Funds Rate is much more correlated.  Even then, the general notion of “friendly vs unfriendly” Fed policy tends to align with “down vs up” for interest rates.  Bottom line: weak data = friendly Fed.  Strong data = unfriendly Fed. With all that in mind, we have some of the month’s most important economic data coming up this week, culminating in Friday’s big jobs report–typically considered to be the most important report for bonds/rates.