Wild Ride on Jobs Day as Fed Speakers Steal The Show
We came into jobs report day expecting some clarity on the size of the Fed's impending rate cut and in hindsight, it's abundantly clear that traders felt the same way. The only catch is that the lion's share of the clarity was reserved for a few short comments from Fed's Chris Waller. The market initially mistook those comments to suggest a 50bp cut, but swiftly reconsidered. In terms of Fed Funds Futures, the volume and volatility surrounding Waller's comments were FAR bigger than the action surrounding the jobs report earlier in the morning. Ultimately, it was a good enough day for rates with bonds holding modest gains.
Econ Data / Events
Nonfarm Payrolls
142k vs 160k f'cast
last month revised to 89k from 114k
Unemployment Rate
4.2 vs 4.2 f'cast, 4.3 prev
Earnings
0.4 vs 0.3 f'cast
last month revised to -0.1 from 0.2
Market Movement Recap
08:52 AM 2-way trading after jobs report with nice initial gains and now some backtracking. MBS up 2 ticks (.06) and 10yr down 2.1bps at 3.708
09:18 AM Back to unchanged in Treasuries. MBS now up only 3 ticks (.09). No reason for the reversal in terms of new info/data.
10:32 AM Back to stronger levels now with 10yr down 3bps at 3.698. MBS up 5 ticks (.16).
12:34 PM Well off the best levels now. MBS down about a quarter from highs, but still up 3 ticks (.09). 10yr down 1bp at 3.72, but up sharply from 3.646 lows.
04:31 PM Lots of back and forth, but not a lot of lasting change. 10yr down less than 1bp at 3.722. MBS up an eighth of a point
Mortgage rates have a long and storied history of making big moves on the day that the big monthly jobs report comes out. In that regard, today was fairly normal. Indeed, the jobs report came out and mortgage rates made their biggest move of the week, dropping to the lowest levels since April 2023. The biggest catch in today's case was the fact that much of the market movement came in response to comments from several Fed officials who weighed in on the prospects for the rate cut in a week and a half. Granted, the jobs report influenced those comments, but they were ultimately reduced to votes for a 0.25% vs a 0.50% rate cut (the Fed is cutting either way). To be fair, the Fed comments had a bigger impact on parts of the market that don't directly correlate with mortgage rates. That was a victory for us today. Rates would have been higher otherwise. If this seems slightly confusing, it's important to remember that the Fed Funds Rate does not move hand in hand with mortgage rates. Mortgage rates move well in advance of the Fed because mortgage rates are tied to the real-time bond market whereas the Fed only updates rates 8 times per year. Moreover, the Fed Funds Rate applies to the shortest time frames (<24 hours) whereas the average mortgage lasts around 5 years. The takeaway is that you should NOT expect mortgage rates to improve after the Fed cuts rates. Mortgage rates have ALREADY improved in anticipation of the rate cut.
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At first glance, this morning's jobs report suggested a modest but clearly-defined increase in the likelihood of a 50bp rate cut from the Fed in 2 weeks. Headline nonfarm payrolls came in at 142k vs 160k forecast. In addition, the past 2 months were revised down by a total of 144k. As of today, that leaves the 3 month average NFP at 116k, a far cry from last year's 232k or 2024's YTD 207k. In other words, it's more than just one month of jobs data that suggests a shift in the labor market. Bonds pounced on that fact at first, but trading has been extremely "2-way" since then.
At one point, the AM gains were completely reversed and yields moved well into negative territory. But we're back near the best levels of the day during the 10am hour--perhaps with some credit due to heavy losses in stocks.
There's more going on here than a simple resolution of heavy positioning among bond traders. There are also real-time changes in the market's expectations for the size of the Fed rate cut. Just look at the volatile swings in September's expected Fed Funds Rate!
But now let's look at the same chart with enough of a y axis to show where the line would need to be in order to convey 100% likelihoods for a 25bp and 50bp rate cut.
Bottom line: there's some volatility in rate cut expectations, but we're far from any meaningful resolution.
Jobs Data Poised to Influence Size of The Upcoming Rate Cut
Thursday ended up being fairly uneventful for bonds, with the balance of data leaving us slightly better off. ADP employment had the biggest positive impact and the selling pressure created by ISM Services was ultimately unable to argue a better case. Friday's jobs report will offer a final ruling of sorts. It will decide whether the early September rate rally will continue and it will also inform the odds of a 25bp vs 50bp rate cut from the Fed in 2 weeks. The range of potential bond market reactions are only limited by the data's ability to exceed or fall short of forecasts. Potential volatility is as high as it's been since the beginning of August.
Econ Data / Events
ADP Employment
99k vs 145k f'cast, 111k prev
Challenger Layoffs
75k vs 26k prev
Jobless Claims
227k vs 230k f'cast 232k prev
Continued Claims
1838k vs 1870k f'cast, 1860k prev
ISM Services PMI
51.5 vs 51.1 f'cast, 51.4 prev
ISM Prices
57.3 vs 56.0 f'cast, 57.0 prev
Market Movement Recap
08:30 AM Flat overnight and stronger after ADP. 10yr down 1bp at 3.746 and MBS up 2 ticks (.06).
10:07 AM Weaker after ISM data (but still barely green on the day). MBS up 2 ticks (.06) and 10yr down 0.2bps at 3.752
10:57 AM Now decidedly weaker with MBS down 2 ticks (.06) on the day and 6 ticks (.19) from the highs. 10yr up 1.1bps at 3.767
03:34 PM back near stronger levels. MBS up 3 ticks (.09). 10yr down 2.3bps at 3.732
Watching Rates
Check our some recent articles and posts about current rates.
Mortgage rates have a long and storied history of making big moves on the day that the big monthly jobs report comes out. In that regard, today was fairly normal. Indeed, the jobs report came out and mortgage rates made their biggest move of the week, dropping to the lowest levels since April 2023. The biggest catch in today's case was the fact that much of the market movement came in response to comments from several Fed officials who weighed in on the prospects for the rate cut in a week and a half. Granted, the jobs report influenced those comments, but they were ultimately reduced to votes for a 0.25% vs a 0.50% rate cut (the Fed is cutting either way). To be fair, the Fed comments had a bigger impact on parts of the market that don't directly correlate with mortgage rates. That was a victory for us today. Rates would have been higher otherwise. If this seems slightly confusing, it's important to remember that the Fed Funds Rate does not move hand in hand with mortgage rates. Mortgage rates move well in advance of the Fed because mortgage rates are tied to the real-time bond market whereas the Fed only updates rates 8 times per year. Moreover, the Fed Funds Rate applies to the shortest time frames (<24 hours) whereas the average mortgage lasts around 5 years. The takeaway is that you should NOT expect mortgage rates to improve after the Fed cuts rates. Mortgage rates have ALREADY improved in anticipation of the rate cut.
Wouldn't it be nice if you could know what was going to happen with mortgage rates before it actually happened? Since the dawn of time in financial markets, there's someone who's willing to make a seemingly compelling prediction about the future for every person who's willing to believe such things are better than 50/50 guesses. When it comes to time frames as short as 24 hours, it's a 100% coin flip. Reason being: Friday's direction will be determined by the outcome of the Employment Situation (aka, the jobs report)--the single most important scheduled economic report on any given month. This installment is particularly important because it's in a unique position to influence the Federal Reserve's decision on the size of the rate cut that will be announced in 2 weeks. Financial markets have long since adjusted to the expected outcome of the jobs report. In other words, if jobs come in at or around 160k payrolls, that's not actionable news even though it would constitute a big improvement over last month's 114k. It's the scenarios where the payroll count is less than 100k or more than 200k where the market is more likely to go a bit wild. Under 100k would likely result in another meaningful move toward even lower rates than today's (already the lowest since April 2023). Over 200k would mean a quick return to the recent range. For better or worse, it's not out of the realm of possibility to see rates move by 0.1 to 0.2%. Contrast that to the average change over the past 2 weeks of less than 0.05%. The report will be released at 8:30am ET which is well before mortgage lenders set their rates for the day.
Mortgage rates moved lower for the 2nd straight day on Wednesday with the average lender right in line with their lowest levels since August 5th. In fact, most borrowers would see little--if any difference between today's loans quotes and those from August 5th. As such, today's rates basically match the lowest in well over a year. This is made possible by a series of economic reports that have "played nice" with the notion of the Fed cutting rates by at least 0.25% at the next meeting in 2 weeks. The bond market (which includes bonds that drive daily changes in mortgage rates) is constantly adjusting to get in position for the Fed's most likely course of action. By the time the Fed actually cuts, most of the mortgage rate movement associated with that cut will have already happened. If economic data is important in determining the near-term momentum, the next two days are critical. Tomorrow's combination of Jobless Claims and the ISM Services index will set the tone early, but it will ultimately be Friday's big jobs report that provides the best chance for clarity on the Fed's rate cut plans. Weaker jobs data would increase the odds of a 0.50% rate cut, and mortgage rates would drop in anticipation. Conversely, a stronger-than-expected jobs report would solidify the case for a 0.25% cut, likely pushing mortgage rates a bit higher in the interim. There's no way to know which direction things will go in the coming days, only that there is greater potential for the move to be bigger than those seen in recent days.
You never know what you're going to get on the days surrounding a 3 day weekend for financial markets, and that's doubly true when it corresponds with the final/first trading day of the month. Despite all of those potential curveballs, the bond market stayed calm enough for mortgage rates to do the same. Friday took rates slightly higher, but that modest move has been erased at the start of the new week/month. Each of the next 3 days contains important economic data with the power to impact rates. The most important report of the week (and the month, for that matter) is Friday's Employment Situation (aka "the jobs report"). This report is especially important as it has a chance to bolster or refute the case made by the previous report (the one that was much weaker than expected, thus resulting in sharply lower rates). In general, stronger data will put upward pressure on rates and vice versa.
