Straightforward Gains After PMI Data
Tuesday's session was infinitely more interesting than Monday's with the caveat being Monday was a total snooze-fest. Bond market volumes were much closer to recent averages and there was even some logical, data-driven volatility. As always, volatility can go both ways and today's went the right way after S&P PMIs came in well below forecast in both Manufacturing and Services sectors. Relative to recent norms, the move was far from big, but it looked big compared to Monday. Notably, even before the data, yields were holding under the technical level at 4.65. The gains merely solidify the sideways vibes that have been in place since the middle of last week.
Econ Data / Events
S&P Services PMI
50.9 vs 52.0 f'cast
S&P Manufacturing PMI
49.9 vs 52.0 f'cast
Market Movement Recap
09:58 AM Weaker overnight, but erasing losses after PMI data. 10yr down 2.6bps at 4.584. MBS unchanged in 6.0 coupons, up 6 ticks (.19) from lows.
10:31 AM MBS catching up with the rally, now up 5 ticks (.16). 10yr down 3.2bps at 4.578.
01:12 PM Solid 2yr auction. Near best levels. 10yr down 3.7bps at 4.573. MBS up 6 ticks (.19).
03:25 PM Off the best levels, but not by much. MBS up an eighth on the day. 10yr down 1bp at 4.60
Mortgage rates are driven by day to day changes in the bond market. Bonds are focused on the Fed and the economic data that shapes Fed decisions. Today's data isn't necessarily big on the Fed's radar, but the market reacted due to its implications on other data. Specifically, the S&P Purchasing Managers Indices (PMIs) came in lower than expected for both the services and manufacturing sectors. PMIs can be thought of as fairly timely, general barometers for the economy because they ask the financial decision makers at businesses about the current state of affairs as well as future plans. One of the topics concerns "prices" which is the hottest of hot buttons for rates these days. On that note, the data mentioned lower price pressures in April due to a deterioration of demand and a slight softening in the labor market. S&P's PMIs aren't as big of a deal for rates as a similar set of PMIs published by the Institute for Supply Management (ISM), but we have to wait until next week for the latter. The first mover advantage of today's data helped drive the reaction. Thankfully, it was good for rates with the average lender moving down to the lowest levels since Friday, April 12th.
Existing home sales posted strong gains in February while sales of new homes slipped slightly. In March each category switched directions. The U.S. Census Bureau and the Department of Housing and Urban Development said newly constructed homes sold at a seasonally adjusted annual rate of 693,000 compared to 668,000 in February while the National Association of Realtors® (NAR) reported that existing home sales fell from a rate of 4.38 million units the prior month to 4.19 million. The increase in new home sales put those transactions up 8.8 percent compared to February and 8.3 percent higher than the March 2023 pace. Sales of previously owned single-family homes, townhouses, condos, and cooperative apartments were down 4.3 percent and 3.7 percent compared to the two earlier periods. [newhomesall] Existing single-family home sales also declined 4.3 percent in March to a 3.97-million-unit sales pace while condo and cooperative apartment sales were down 4.9 percent to 390,000 units. Single-family sales were 2.8 percent and multi-family sales were 11.4 percent lower year-over-year. New home sales rose by 10,000 units from February to 67,000 on a non-seasonally adjusted basis. Analysts polled by Trading Economics had expected new home sales to remain at February’s 668,000 level and had expected a smaller 2.2 percent decline in existing home sales to 4.2 million units. The inventory of new homes remains healthy with 477,000 unsold homes , an estimated 8.3-month supply at the current rate of sales and a monthly increase of 5.7 percent. The number of existing homes available for sale did increase by 4.7 percent to 1.11 million units but remains anemic at a 3.2-month supply.
Is it any surprise to see a strong reaction to economic data when the phrase "data dependent" has come to unequivocally rule all other approaches to understanding the interest rate outlook? Yes, actually, it can sometimes still be a surprise because data dependency depends on the data being depended upon. In today's case, we have a report that has been inconsequential more often than not over the past decade, but increasingly relevant in the last 2 years. There could be some debate as to whether that's due to the gradual increase of acceptance for S&P's PMI data in a country where ISM has long been the dominant source of PMI data or whether it's simply due to the bond market's strong desire for econ data. Either way, it's a market mover today.
The reaction is so blatantly obvious that it begs the question as to how the underlaying data justifies the move. After all, there wasn't a huge departure in Indices themselves. We'll focus on the services side of the economy here, just to keep the chart simple, but the takeaway from Manufacturing is no different.
Broader context is helpful. Today's move in yields is well within the weekly range and not-at-all meaningful in the bigger picture. In other words, it becomes less impressive the more we zoom out.
“The next time you dislike your life, remember it’s all about perspective. I know someone who reads 2-3 books a week, works out twice a day, has no financial worries, and has people who want to have sex with him all the time. Yet he constantly complains how much he hates prison.” Being “locked up” with a 3 percent loan on a home is misleading and is certainly not imprisonment. In fact, people are indeed selling. “’We can’t just let our kids grow up while the Fed figures out what they think about inflation,’ said Luke Bolton, who listed his home in March and expects to close soon on a purchase.” Perhaps the “lock in effect” is ebbing ahead of the summer purchase season. Some of it is geographical… Midlife crises are alive and well, as Miami is officially the city in which Gen Xers made up the largest share of potential homebuyers. (I don’t know how a generation moved down to only being 14 years, but Gen X are those born from the mid-1960s to the late 1970s.) Lenders are coming up with creative solutions of home affordability issues, like LoanSense. Or found here, this week’s podcasts are sponsored by Calque. With The Trade-In Mortgage powered by Calque, homeowners can buy before they sell, make non-contingent offers, and tap their home equity to fund the down payment on their next home. Today’s has an interview with influencer Ally Carty on carving a path in mortgage as a young person in the industry. Lender and Broker Products, Software, and Services
Boring Monday Keeps The Focus on Next Week
Monday may as well have been a 3rd weekend day as far as the bond market is concerned. While equities are preoccupied with earnings, bonds were trading at about HALF their normal clip based on the past 2 weeks of average volume. There were no relevant economic releases and really not even any interesting market moving headlines. Buyers pushed back against modest overnight weakness in the AM hours and then drifted mostly sideways in the PM hours. Days like this only intensify the focus on next week's important slate of events which include a Treasury refunding announcement, Fed announcement (with likely QT tapering on the agenda) and the jobs report.
Market Movement Recap
08:17 AM Modestly weaker overnight with 10yr yields up 3.3bps at 4.655 and MBS down 2 ticks (.06).
10:53 AM Back in positive territory, MBS up 3 ticks (.09) and 10yr down 0.4bps at 4.618
02:52 PM Best levels at noon, but dialing back a bit into the PM hours. Trading levels right in line with last update. MBS down 3 ticks (.09) from highs, but still up 3 ticks on the day.
03:52 PM Back near best levels. No particular reason or significance. MBS up 5 ticks (.16) and 10yr down 0.7bps at 4.616
Mortgage rates began the new week at almost exactly the same levels seen at the end of last week. There were no major events or economic reports to cause volatility in the underlying bond market, but bonds were able to improve modestly by the end of the day. In general, bond market improvement leads to lower rates. The catch, in this case, is the improvement was fairly small and that it was offset to some extent by modest weakness earlier in the day. Even so, a handful of lenders offered mid-day improvements. Other lenders will technically be more likely to improve tomorrow morning if bond market trading levels are unchanged (and that's not something that can be guaranteed or even assigned better than a 50% probability). By staying near Friday's levels, the average lender is just shy of the highest rates in 5 months. A top tier conventional 30yr fixed scenario is still in the mid 7% range. Volatility will definitely be higher next week due to the calendar of events, but it could start increasing in the coming days as well. There's no directional connotation to "volatility." It's an inherent 2-way street. The direction of the movement will depend on the tenor of the data. It looks like rates are at least willing to treat current levels as a ceiling, but only if we finally see some friendlier data--something that's been hard to come by since February.
When I was a kid, whenever I would walk by a pay phone or newspaper vending machine, I’d check the coin change slot. Or periodically check under my Dad’s La-Z-Boy… every penny or dollar counted! (Nowadays, I still get excited when I find a forgotten quarter in my own pants or backpack.) Plenty of folks at last week’s Great River Conference were trying to do the modern equivalent of that by learning about the current vendor offerings of technology, or meeting with their current vendors to see if pennies or dollars could be saved on every loan given the current $12k+ cost per funded loan. Smart and compliant speed and efficiency are critical… speaking of which, found here, today’s podcast features an interview with Guaranteed Rate’s Victor Ciardelli on the company’s goal of closing a loan in one-day and how they will get there. This week’s podcasts are sponsored by Calque. With The Trade-In Mortgage powered by Calque, homeowners can buy before they sell, make non-contingent offers, and tap their home equity to fund the down payment on their next home. Lender and Broker Products, Software, and Services When people say they can see miles and miles on a clear day, they aren’t wrong: the horizon is about 3 miles away, with some variation depending on your height. And whatever may lie beyond, Dark Matter Technologies is helping lenders prepare with its first annual Horizon user conference. The event kicks off Wednesday at the Fontainebleau Miami Beach and will bring together hundreds of industry notables to network, get the inside scoop on Dark Matter’s innovation roadmap, and explore business trends including market growth strategies, AI, and cybersecurity. Feeling a little FOMO? Request a consultation today and your team could be working smarter with the Empower LOS, and catching some Florida sun, by this time next year.
It's no secret that a vast majority of bond market movement these days occurs in response to a small handful of economic reports and the Fed's quarterly updates on the rate hike outlook (via the dot plot). That means we see several weeks each month without any big ticket market movers. This week arguably qualifies. But how could that be, considering Friday's PCE price index is the same one the Fed refers to as its preferred gauge of the 2% inflation target? PCE just hasn't caused big reactions for a few reasons (similarity to CPI and predictability due to other data that comes out earlier).
Assuming the track record of nonreactions continues, the typical pattern of volatility remains intact as the following week brings big ticket data and a Fed announcement (no updated dot plot, and no rate cut, but there could be some change to policy that we'll discuss next week).
On the topic of volatility, bonds are off to a slow start this week, with no major escalation in the Middle East over the weekend. Some analysts attribute the modest bump in stock prices and bond yields to that absence of flight-to-safety trading.
Sometimes Sideways is The Best Case Scenario
Granted, there was a possibility that today could have been a rally day for the bond market, but as seen in the overnight trading session, that possibility depended on the escalation of war in the Middle East. There aren't many other reasons for bonds to push back too much on recent weakness. One of the only other reasons would be Friday position squaring and short covering, but that would be just as much of an indication of ongoing bearishness in bonds. In that sense, holding sideways is possibly the best victory we could have hoped for today. The fact that we've avoided Tuesday's high yields through the end of the week could even signal sideways vibes until May, at which point data and the Fed will let us know the direction of the next big move.
Market Movement Recap
09:38 AM Initially stronger overnight, but giving up gains since then. 10yr down 1.7bps at 4.609. MBS up 1 tick (.03).
10:27 AM 10yr all the way back to unchanged at 4.627. MBS down 2 ticks (.06)
02:02 PM Broadly sideways and choppy, but currently unchanged in MBS and 10yr.
04:27 PM Still sideways. MBS up 1 tick (0.03) and 10yr down half a bp at 4.622
