Markets Expected More Dovishness From Powell
AM data was a mixed bag that left bonds slightly weaker on the day, but not in an alarming way. GDP was mixed, coming in much stronger at the headline, but with lower domestic demand numbers. PCE prices were revised 0.2 higher for the quarter, meaning that tomorrow's monthly PCE data has a 1 in 3 chance of being the culprit (slightly raises risk of higher inflation reading). But the day's big focus was on Fed Chair Powell's press conference. The announcement itself was inconsequential. Powell had a chance to get a bit more dovish in response to recent inflation data, but instead stuck to the exact same script (hoping tariff inflation is a one-off, but wants to wait and see, and has luxury of doing so based on 4.1% unemployment). Bottom line: no bone thrown to rate cut optimists = Fed Funds Futures priced in lower odds for near-term cuts. This spilled into bonds only modestly, leaving 10yr yields in line with AM highs and leaving the broader trend as sideways as ever.
Econ Data / Events
ADP Employment
104k vs 75k f'cast, -23k prev
Market Movement Recap
09:29 AM A hair weaker overnight with additional selling after data. MBS down 5 ticks (.16) and 10yr up 5bps at 4.373
12:53 PM A bit of resilience heading into Fed announcement. MBS down 2 ticks (.06) and 10yr up 4.3bps at 4.365
02:08 PM very small, friendly reaction to Fed. MBS down 1 tick (.03) and 10yr up 2.6bps at 4.348
03:22 PM Weaker after Powell press conference. MBS down 5 ticks (.16) and 10yr up 5.3bps at 4.374
Wednesday brought another incremental increase in the level and importance of the calendar events with the power to create volatility for rates. Some of the events were economic reports out earlier in the morning. The other 2 events consisted of the Fed's policy announcement and the subsequent press conference with Fed Chair Powell. The economic data was generally unfriendly for rates. ADP's payroll count was higher than expected which suggests a higher risk that this Friday's official jobs report will follow suit (although the correlation is very weak over short time horizons). Stronger employment is bad for rates, all else equal. The other key report was GDP. While overall growth picked up to 3.0% in Q2 (much stronger than the 2.4% forecast), there were nuances in the data that showed lower inflation-adjusted spending in the U.S. The aspect of the GDP data that was arguably more troublesome for rates was the increase in the PCE price index. Because the GDP data is the first release of Q2, it means that June's PCE inflation is part of that quarterly PCE number (PCE, which stands for Personal Consumption Expenditures, is part of GDP if you're not confused enough already). Incidentally, the monthly PCE data for June also comes out tomorrow. In other words, today's quarterly data let us know that one of the 3 months in the quarter was higher than expected. It may turn out to have been April or May (which wouldn't be too bad for rates), but if the increase is concentrated in June's data, it could put more upward pressure on rates tomorrow.
Although swings in net exports have affected continue to affect the data, recent indicators suggest that growth of economic activity has continued to expand at a solid pace. moderated in the first half of the year. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Is it just a matter of time until insurance companies tell us where to live, what to make out houses out of, and what, exactly, we’re allowed to plant in our yards? We may be entering that world. Lenders and vendors live via rules and regulations. I mention this because attorney Brian Levy really doesn’t like the LO Compensation Rule. In fact, in his latest Mortgage Musing take down of the rule, he says it is “brutal.” Levy offers his thoughts about the CFPB proposal to rescind the LO Comp Rule as well as the recently filed LO Comp class action case against loanDepot (reported in Chrisman Commentary last Thursday). (You can sign up to receive Brian’s Mortgage Musing directly here.) While we’re talking regulations, Weiner Brodsky Kider PC did a write up on how the CFPB terminated a consent order that it had entered into with a Florida-based mortgage servicer concerning allegations that the company had failed to inform borrowers of foreclosure protections while actively proceeding with foreclosures against them and that the company had violated a previous consent order. (Today’s podcast can be found here and this week’s are sponsored by nCino. nCino Mortgage unites the people, systems and stages of the mortgage process into a seamless end-to-end solution embedded with data-driven insights and intelligent automation. Hear an interview with Verisk’s Kingsley Greenland on recent flooding events impact on housing and how insurance company modeling has quickly surpassed government modeling on disasters.)
There were two key reports at the start of trading today. The 815am ADP data was fairly forgettable, coming in at 104k vs 75k f'cast, and -23k previously. This is well within a range of outcomes that are arguably inconsequential for bonds. Subsequent trading reflected that fact. 15 minutes later, GDP came out at 3.0 vs 2.4 f'cast, and -0.5 previously. Bonds are basically trading that GDP beat, even though we disagree that they should be. Reason being: true domestic demand metrics continued to fall. Q2 was inordinately helped by the same net export component that tanked Q1 numbers.
Contrast that to inflation adjusted sales to domestic purchasers, which continues a trend of contraction.
Since the bond market weakness doesn't really make sense in this light, we can also consider that core PCE prices were 0.2 higher than expected which means tomorrow's monthly PCE data runs a higher risk of coming in hotter. Either way, bonds have only erased about half of yesterday's gains so far. The Fed announcement and press conference are more than capable of reversing this move or adding to the pain.
Watching Rates
Check our some recent articles and posts about current rates.
Wednesday brought another incremental increase in the level and importance of the calendar events with the power to create volatility for rates. Some of the events were economic reports out earlier in the morning. The other 2 events consisted of the Fed's policy announcement and the subsequent press conference with Fed Chair Powell. The economic data was generally unfriendly for rates. ADP's payroll count was higher than expected which suggests a higher risk that this Friday's official jobs report will follow suit (although the correlation is very weak over short time horizons). Stronger employment is bad for rates, all else equal. The other key report was GDP. While overall growth picked up to 3.0% in Q2 (much stronger than the 2.4% forecast), there were nuances in the data that showed lower inflation-adjusted spending in the U.S. The aspect of the GDP data that was arguably more troublesome for rates was the increase in the PCE price index. Because the GDP data is the first release of Q2, it means that June's PCE inflation is part of that quarterly PCE number (PCE, which stands for Personal Consumption Expenditures, is part of GDP if you're not confused enough already). Incidentally, the monthly PCE data for June also comes out tomorrow. In other words, today's quarterly data let us know that one of the 3 months in the quarter was higher than expected. It may turn out to have been April or May (which wouldn't be too bad for rates), but if the increase is concentrated in June's data, it could put more upward pressure on rates tomorrow.
After three straight days at exactly the same level, average 30yr fixed rates began to move lower again on Tuesday. It should immediately be clarified that the word "began" implies a certain likelihood of continuation whereas no such likelihoods can be guaranteed when it comes to the bond/rate market. In other words, rates did indeed begin to move lower again, but they could stop moving lower as early as tomorrow. One slight advantage in the present scenario is that the bond market improved steadily throughout the day and most mortgage lenders didn't drop their rates as much as the bond market improvement suggested. This means that the average lender could lower rates a bit more tomorrow assuming the underlying bond market stays exactly where it is right now. Bonds could easily move either direction tomorrow morning. In addition to volatility that can occur during overnight/overseas trading, there are several big-ticket economic reports set to be released before mortgage lenders set their rates for the day. Then in the afternoon, the Fed announcement can create additional volatility. Bottom line: today was good, lenders have a bit of a cushion from afternoon bond market gains, and tomorrow is another potentially volatile day (for better or worse).
If any given week of movement in the mortgage rate world came with disclaimer, this one would be: "Warning. An absence of volatility on Monday has no bearing on odds for volatility in the rest of the week." More simply put, you're essentially guaranteed to see more rate movement over the next 4 days simply because today saw none. Of all of the days this week, Monday was the best candidate for a ho-hum level of movement because it was the only day without any major economic data on tap. Rates are based on bonds, and econ data is a key source of inspiration for bonds. While not technically econ data, there were a few scheduled events today that may have mattered, but ultimately didn't. These included several Treasury auctions as well as Treasury's borrowing estimates for the quarter. After accounting for technicalities and timing, this quarter's borrowing estimates were only 4 bln higher than previously predicted. When the average borrowing amount has been running around $500bln, this is essentially an accounting adjustment and it's no surprise that the rate market didn't care.
It's no great secret that the outgoing week didn't offer much in terms of hotly anticipated events with the power to make or break momentum in the rate market. But as it happened, there was ultimately no impact whatsoever by the time Friday afternoon rolled around. Actually, rates were already 'unchanged' on the week as of yesterday afternoon. Friday just happened to be unchanged as well. In terms of the bond market movement underlying the mortgage rate stability, we got some help from headlines regarding the improvement in relations between the Trump admin and Fed Chair Powell. After touring the Fed's construction site, the President said these sorts of cost overruns happen and he doesn't want to put them in the category of "grounds for removal," nor is there any pressure for Powell to resign. In general, the bond/rate market has done better during the moments where it looks like Powell's job is safer. Conversely, longer term bonds/rates have done worse when faced with the prospect of a Fed Chair replacement that would lower short term rates more aggressively (seeming paradox, but actually quite logical to bond traders). For every degree to which the present week was calm and uneventful for rates, next week brings the heat. There are big ticket events on every single day and the biggest of tickets in the form of Friday's jobs report. As always "potential" volatility doesn't guarantee a big move in either direction. All we know is that odds are higher for big moves--especially after Friday's data.
