Mortgage rates began the day perfectly in line with yesterday’s latest levels for the average lender. By the afternoon, the underlying bond market had lost enough ground that a handful of lenders were forced to issue mid-day reprices thus taking the average just a bit higher. Unlike the past few days, there wasn’t a highly important economic report to cause volatility this morning. The underlying bond market drifted into progressively weaker territory on a combination of factors.  These included the market’s reaction to the European Central Bank’s policy announcement as well as headlines regarding a phone call between Trump and Xi that may lead to improved trade relations. In general, lower tariffs and freer-flowing trade have resulted in stocks and rates moving higher together–what the market sometimes refers to as a “risk-on” move. Stocks notably ended up moving lower by the afternoon even as bond yields remained higher.  We can reconcile this in several ways, but none of them are too important. What’s important is that tomorrow morning brings the big jobs report–the data that has the greatest potential to cause volatility for rates of any of this week’s offerings. Potential isn’t always realized.  The farther the number falls from forecasts, the greater the potential impact, for better or worse.

Bonds began the morning in rally mode, even if not in an extreme way.  Gains lasted for about 20 minutes before reversing.  The shift was accompanied by slightly elevated volume, indicating a genuine underlying motivation. Fortunately, there are two good candidates to choose from.  Unfortunately, it’s hard to assign an exact amount of blame/credit to each of them. Based on stock market volatility, the Trump/Xi call is definitely on the radar. Stocks surged on the announcement, and then tanked when the call ended without any additional headlines. The ECB announcement also got attention based on the reaction in the Euro and EU yields.  The net effect has been a return to roughly unchanged levels for Treasuries and MBS.  

The first-of-its-kind growth restriction established a new precedent for how regulators can address a broken bank culture. With scant information about why the cap was lifted, the action provides little clarity on what Wells did right — or what the Fed did wrong.

The Senate voted to confirm Federal Reserve Gov. Michelle Bowman’s nomination to be the vice chair for supervision at the central bank in a 48-46 party-line vote.

Two- to 10-year yields reached the lowest levels since at least May 9 after the ISM Services gauge for last month signaled contraction for the first time since last June.

Closed-end home equity volume was up 13% year-over-year in the fourth quarter, outpacing HELOCs originations, which only grew 8%, TransUnion reported.

Industry representatives indicated changes to the requirements that give servicers more leeway would be helpful to more moderate-sized companies in particular.

Whether or not today’s drop in rates is meaningful depends on one’s perspective, but in the context of recent rate movement, it’s definitely noticeable.  The simplest way to think about the improvement is as follows: the average lender is now about an eighth of a percent lower in just over a week. If we want to be more specific, today’s average top tier 30yr fixed rate is down to 6.87% from 6.96% yesterday, making it the best single day drop since mid April.  The same rate was 7.08% exactly 2 weeks ago.   Mortgage lenders tend to offer rates in eighth point increments.  When the average was at 7.08%, the prevailing rate quote would have been 7.125%.  Today it would 6.875%, or a 0.25% improvement. This would drop the payment on a $400k mortgage by roughly $67/mo. As far as motivations for today’s larger gains, it all comes down to economic data (which is really the only game in town if we hope to see further improvement). The eternal trade off of the relationship between data and rates is that the economy must weaken in order for rates to drop. Today’s data featured a sharply weaker reading in the labor market from ADP as well as a the lowest reading in nearly a year on a key service sector gauge.   Tomorrow is the least consequential day of the week in terms of economic data, but Friday brings the most significant data of the week in the form of the big jobs report. If it corroborates the message of today’s data, rates could continue lower, but it’s important to note that there are many past examples of the jobs report being wildly different from the data that comes out earlier the same week. 

Big Bond Rally After ADP and ISM

We knew the onus was on weaker economic data to justify any decent drop in rates/yields and we know the first week of any given month has a high concentration of relevant reports and that today’s slate is 2nd only to NFP day. Today’s heavy hitters included ADP Employment and ISM Services.  Both were weak–especially ADP. The employment component of the ISM report actually improved and that serves as a reminder that data doesn’t always agree–especially if the sample size is a single month. If Friday’s jobs report agrees with ADP, there’s more room for improvement for rates.  If NFP does like ISM’s employment index and rises slightly from last month, bonds will likely have to give back some of today’s gains. Future musings aside, it’s nice to see the market is willing to do what it’s supposed to do with this type of data. 

Econ Data / Events

ADP Employment

37k vs 115k f’cast, 62k prev

ISM Services

49.9 vs  52.0 f’cast, 51.6 prev

ISM Prices

68.7 vs 65.1 prev

ISM Employment

50.7 vs 49.0 prev

Market Movement Recap

08:26 AM stronger after ADP. MBS are up an eighth of a point and 10yr yields are down 4.6bps at 4.418.

10:37 AM Additional gains after ISM data.  MBS up 10 ticks (.31) and 10yr down 8.3bps at 4.383

03:07 PM Giving up some ground but mostly sideways after additional gains.  MBS up more than 3/8ths and 10yr down 10.3bps at 4.362

It’s been a fairly simple morning so far for the bond market. Both of the morning’s key economic reports came in weaker than expected. In the case of ADP employment, that’s fairly straightforward and fairly substantial (37k vs 115k f’cast), even though it’s always worth remembering how inconsistent the correlation with NFP (Friday’s big jobs report) can be. The ISM Services (or “non manufacturing”) data was more nuanced.  The growth metrics were mostly weaker, and decidedly so.  But the employment index moved up–always important on jobs week.  In addition, the ISM price index continues to surge–something that bonds can’t help but notice.