Rates End Week at Best Levels; Next Week Could be Huge

It was a very slow and steady week for mortgage rates. On all 5 days, the average top tier 30yr fixed rate moved by 0.02% or less.  This is a small enough change that the average borrower wouldn’t see any detectable difference in a loan quote from one day to the next. But due to most of the changes being toward lower rates, Thursday and Friday would be modestly but measurably better than the first 3 days of the week. This is an ideal scenario for prospective borrower and mortgage professionals. One of the most frustrating and challenging realities of this industry is the extent to which rates can change over short periods of time. So not only did we enjoy the lowest rates in more than 10 months, but volatility was essentially non-existent to boot! It’s not a huge surprise to see this sort of stability given that there were no big-ticket risks on the event calendar this week. That changes in a major way in the week ahead. Right from the outset on Tuesday (Monday is a Federal holiday), there are relevant economic reports on all 4 days. Friday’s jobs report is especially important considering it was the last jobs report that was primarily responsible for the recent rally to 10-month lows. Bottom line: to whatever extent it was unlikely that the outgoing week would see much volatility, the forthcoming week is likely to be just the opposite, for better or worse. 

Calm Day to End A Calm Week

Calm Day to End A Calm Week

While Friday itself may not have resulted in a rally for the broader bond market, it was nonetheless just as calm as any other day this week in terms of volatility. That’s a bit more impressive considering it was the only day with big-ticket econ data. Overall, the week was marked by slow, steady gains for no particular reason. With that, the entirety of August, post-jobs-report did exactly what it was supposed to do. Specifically, it held a narrow enough range to avoid challenging the range set by the last jobs report day. The upcoming week–while shorter than normal due to the Labor Day holiday–is infinitely more capable of producing bond market volatility. Even the supporting actors are arguably heavy hitters in terms of econ data. Friday’s jobs report speaks for itself. Bottom line: additional labor market weakness could easily help bonds break new ground at lower yields while unexpected resilience could firmly reinforce recent floors.

Econ Data / Events

Core PCE (m/m) (Jul)

0.3% vs 0.3% f’cast, 0.3% prev

Core PCE Inflation (y/y) (Jul)

2.9% vs 2.9% f’cast, 2.8% prev

Inflation-Adjusted Spending (Consumption) (Jul)

0.5% vs 0.5% f’cast, 0.3% prev

Personal Income (Jul)

0.4% vs 0.4% f’cast, 0.3% prev

Wholesale inventories mm (Jul)

0.2% vs 0.2% f’cast, 0.1% prev

Chicago PMI (Aug)

41.5 vs 46 f’cast, 47.1 prev

Consumer Sentiment (Aug)

58.2 vs 58.6 f’cast, 61.7 prev

Sentiment: 1y Inflation (Aug)

4.8% vs 4.9% f’cast, 4.5% prev

Sentiment: 5y Inflation (Aug)

3.5% vs 3.9% f’cast, 3.4% prev

Market Movement Recap

08:34 AM Minimal movement after PCE data.  MBS are down 2 ticks (.06) and 10yr yields are up 1.4bps at 4.22.

01:03 PM Slightly stronger heading into PM.  MBS down only 1 tick (.03) and 10yr up 1.9bps at 4.224

Loan Calculator and Verification Tools; Event Calendar; Insurance Costs; Mortgage Banking Bound Interview

“The hardness of the butter is proportional to the softness of the bread.” Proportionality is important, whether in a restaurant or in a lender watching adjustable-rate loans (where the market favors credit unions and banks). With short-term rates dropping relative to long-term rates, the adjustable-rate mortgage market share has increased. Lenders that I have spoken with (mostly bank and credit union folks) say that the vast majority of ARM applications are 5-year, 7-year, and 10-year products, which, for anyone who’s been in the business for 25 years, is a shift from the mid-2000s when we had various types of 1-year ARMs, along with 3/1 and 5/1 products. For potential borrowers who have watched their landlords change rental rates, it may seem like their monthly payments are adjustable. But unfortunately for lenders, renting is cheaper than buying in 49 out of 50 MSAs with an average savings of $908 a month. Pittsburgh was the only MSA where buying is cheaper. The worst MSA? Austin, where it costs $1,467 to rent a starter home and $3,150 to buy one. More evidence of an unaffordable housing market: the homeownership rate has fallen to the lowest level since 2019. The drop affected all age groups, with the 45-54 age group seeing the largest percentage decline. (Today’s podcast can be found here and this week’s is sponsored by Arrive Home. Arrive Home helps mortgage lenders connect creditworthy buyers with down payment assistance and affordable homeownership solutions, offering tools that empower lenders and uplift communities. Hear an interview with MBA’s David Upbin and Arch MI’s Kevin Popoli on the Mortgage Banking Bound program and how it is preparing college students for careers in mortgage banking.)

PCE Inflation Offers No Surprises

There are two big picture inflation reports in US that address consumer prices: CPI and PCE. Of the two, PCE is broader and more highly regarded by policymakers. The downside is that it comes out about 2 weeks later for the same month of price data. PCE is also easier to forecast due to other inflation data being out earlier in the month. As such, it’s less common to see big deviations from forecasts and today was no exception with all monthly and annual numbers perfectly hitting expectations. Unsurprisingly, bonds haven’t really changed from opening levels.

One of the only interesting developments (debatably, perhaps) is that the “supercore” reading (core services inflation excluding housing) was 0.1% lower in PCE versus the figures reported by bloomberg that were extrapolated from CPI 2 weeks ago. Supercore is still slightly elevated and has been trending higher, but 0.390 is a lot better than 0.481 (reported with CPI) when it comes to inflation staying out of the way of a Fed rate cut.