Steering clear of unfriendly economic data has been an increasingly challenging task for the bond market in April.  While it might be an overstatement to say we’re going out with a bang, today’s Employment Cost Index (ECI) is at least a loud pop.  ECI–a measure of labor costs and compensation (including benefits)–is not a report that had been on the trader radar as a big ticket market mover until Powell began mentioning it regularly in the past few years. 
Today’s installment painted an unfriendly picture for inflation/rates by suggesting the progress seen through Q4 was reversing in a major way in Q1.

The bond market reaction was clear and immediate at 8:30am, even if it wasn’t as huge as we might see for a CPI or NFP that suggested hotter inflation or spending power.  

Don’t believe in climate change, rising sea levels, or cities sinking (“subsiding”)? Venice is sinking. So are Rotterdam, Bangkok, and New York (though a few spots are rising!) But no place compares to Jakarta, the fastest-sinking megacity on the planet. Over the past 25 years, the hardest-hit areas of Indonesia’s capital have subsided more than 16 feet due to illegal wells, diminishing groundwater, and a rising sea level. Many billions will be spent moving an entire city. In the United States, insurance issues have become obvious problems. Do you think you have privacy in your car? Think again, and not only that, insurance companies are using driving data to set premiums. Uh oh. In Florida, several high-rise condo projects (with units for sale) are sitting as insurance companies have dramatically hiked their hurricane coverage costs so some projects are renewing at 50-60 percent coverage only, which makes the units unable to be financed. I’m told we would have to review each one as an exception, and it would probably depend on the loan to value. SFRs are one thing when it comes to un-insurability, but when entire condo projects have units at risk, what are folks to do? This is not up to the individual condo owners as it’s covered in the master condo policy, not an individual HOA policy. (Found here, this week’s podcasts are sponsored by Essex Mortgage. Essex specializes in providing exceptional mortgage subservicing solutions tailored to meet your specific needs. Looking to capitalize on your excess servicing strip? Check out Essex’s servicing offerings today! Hear an interview with Jeremy Potter on if home ownership is still part of the American Dream.)

The Federal Housing Administration removed housing finance firms from the list of permitted interested-party contributors in a new reverse-mortgage rule.

The company’s attorneys had previously managed to successfully decertify the class in the seven-year long case, but the decision was reversed last year.

Banks and other financial market participants have been keyed into the central bank’s communications around monetary policy expectations. But in an unpredictable economy, the guidance doesn’t always hit the mark.

UWM’s leader Mat Ishbia saw his total compensation balloon to over $12 million compared to 2022, while Rocket’s CEO received $3.4 million during the first four months of his tenure.

The Federal Housing Finance Agency rule originally proposed last year aims to make it tougher to roll back measures designed to encourage more equitable lending.

Decent Resilience in Spite of a Few Headwinds

Considering the volatility that may lie ahead, Monday ended up being a calm and decent start to the week.  The ostensible overnight headwind was the rumored currency intervention by the Japanese government.  In the past, this has caused heavy selling in Treasuries, but that wasn’t the case.  As such, this wasn’t really a headwind.  The more legitimate challenge came in the form of higher borrowing estimates from Treasury this afternoon.  Bonds actually did a good job of taking that news in stride, but nonetheless moved to weaker levels.  It was a bigger problem for MBS due to the way they relate to the Treasury yield curve these days.

Market Movement Recap

10:14 AM Moderately stronger overnight, but pulling back a bit.  10yr still down 2.4bps at 4.64.  MBS up an eighth.

11:48 AM Some two way volatility with gains into the 11am hour and a small pull-back now.  MBS up 3 ticks (.09) and 10yr down 3bps at 4.634.

01:24 PM Slightly stronger.  MBS up 5 ticks (.16).  10yr down 4.8bps at 4.617.

03:40 PM Moderately weaker after Treasury refunding estimates.  MBS at lows, but still up 2 ticks (.06) on the day.  10yr yields down 3.7 on the day at 4.628.

Mortgage rates didn’t change much at all over the weekend with the average lender still in the highest territory since November.  The average conventional 30yr fixed rate is just under 7.5% for top tier scenarios. Things could end up changing quite a bit by the end of this week owing to a slew of important events and economic reports.  The sneak preview of one of those events took place this afternoon as the U.S. Treasury released borrowing estimates for the 2nd quarter.   Why would this matter?   Rates are driven by bonds and U.S. Treasuries are the bonds that set the tone for all other bonds/rates in the U.S.  Bonds can be influenced by a number of factors, but supply and demand always matter to any financial security.  The Treasury department directly comments on the supply side of that equation in these announcements.  When the number is bigger than the market expects, it puts upward pressure on rates, all other things being equal. Today’s number was slightly bigger, but the market did a good job of taking that in stride.  The rest of the week’s calendar is even more likely to cause volatility–especially on Wednesday and Friday.  As always, volatility can either be good or bad for rates.

Monday is one of the quietest days of the week although there will be a potentially important update at 3pm when Treasury releases borrowing estimates for the upcoming quarterly auction cycle.  This 3pm release has been a surprisingly capable market mover in the past few quarters. 
The only other development at the start of the week is already in the rearview, probably…  It involved suspected (citing “sources familiar with the matter”) intervention in currency markets by Japan’s Ministry of Finance.  The following chart suggests it is highly likely, but in this case, it didn’t have an impact on Treasuries.  Past episodes of similar intervention have scared US rates traders due to heavy selling of Treasuries.  That could still happen in the near future, but it didn’t happen this time.

Tuesday’s headliner is the Employment Cost Index–a report the Fed has increasingly mentioned recently.
Things get serious on Wednesday with the final Treasury auction size announcement in the morning as well as ADP jobs, ISM manufacturing, and JOLTS.  The afternoon hosts the Fed announcement which may see the start of reduced balance sheet shrinkage (i.e. QT tapering).  It will also give Powell another chance to comment on the fading rate cut prospects thanks to recent data. 
After a break in the action on Thursday, the week finishes strong with the big jobs report and ISM services.