Not as Bad as it Could Have Been
After Wednesday's Fed-driven sell-off, it was unlikely if not impossible that bonds wouldn't end up saying they had a bad week. That is certainly still the case, but after Friday, it's not as bad as it could have been. PCE inflation came in at 0.1% at the core level, month over month. If inflation repeated that performance for 12 months, annual inflation would be below the 2.0% target. Headline inflation is even lower and has been doing even better in terms of getting back to a target trajectory. Bond traders are largely able to price in PCE data because a good amount of it can be calculated from CPI/PPI which come out 2 weeks earlier. There was still enough of a surprise for 10yr yields to drop a quick 6bps and ultimately end the day 4bps lower than yesterday.
Econ Data / Events
M/M Core PCE
0.1 vs 0.2 f'cast, 0.3 prev
Y/Y Core PCE
2.8 vs 2.9 f'cast, 2.8 prev
Market Movement Recap
09:25 AM Slightly stronger overnight with additional gains after PCE data. MBS up 11 ticks (.34) and 10yr down 6.8bps at 4.503
01:14 PM Generally stronger, but off the highs. MBS up 10 ticks (.31) and 10yr down 6.4bps to 4.507
01:52 PM Down just over an eighth from highs in MBS. 10yr down 6bps at 4.511
The week's big story is still the big jump in rates that took place after Wednesday's Fed announcement. And while rates remain noticeably elevated on the week due to that jump, they're set to end the week at slightly less elevated levels. Credit this morning's inflation data for that development! Part of Wednesday's Fed Day drama involved a renewed focus on inflation reports. That added to anxiety because Friday's PCE inflation index is one of the two big inflation reports that come out each month. The bond market that underlies day-to-day interest rate movement is most focused on what's known as "core" inflation, which discounts the more volatile food and energy components. If month over month core inflation is running just under 0.2%, annual inflation would eventually hit its 2.0% target. Today's monthly core PCE came in at 0.1%, which was lower than the market expected. In year over year terms, there's more work to do, as PCE remained at 2.8%. The market actually expected a 0.1% increase on the annual number. In general, when reports like PCE (or its counterpoint, CPI) come in lower than expected, it puts downward pressure on rates. Today was no exception with the average lender getting back almost half of the ground lost on Wednesday. Top tier 30yr fixed rates are still over 7%, but only just.
This week's biggest to-do in terms of economic reports was this morning's PCE inflation data. The fact that the Fed just said it was shifting its primary focus away from the labor market and back toward inflation made PCE all the more interesting. Thankfully, it came out lower than expected at the core level, both in monthly and annual terms (a nice development considering yesterday's Q3 numbers were higher than expected). The unrounded monthly number of 0.11 was very close to the rounded 0.1%. Bonds rallied in response, but the gains have been modest in comparison to Wednesday's losses.
In addition to the modest response to the PCE data, it's also important to remember that PCE isn't the only market mover in play. It's the end of the week and effectively the end of the year for many traders. Year-end trading can have it's own impact on yields, regardless of economic data. This could create a situation where we see selling pressure later today for no apparent reason. That said, it could also create buying demand, but that hasn't been the norm for this year's suspected year-end trades.
Fairly Uneventful Follow-Up to Fed Day
Considering everything that transpired yesterday, today's follow-up was about as calm as we could have hoped for. Bonds lost ground, but the losses were focused on the long end of the curve. That limited the damage for MBS, which have been hanging out with the middle of the curve these days. AM econ data was a mixed bag despite appearing to be unfriendly at first glance. If it had any ill effect, it was minimal. In the bigger picture, Thursday simply represented a leveling-off after Wednesday's rout. Friday brings monthly PCE inflation, which is certainly capable of causing a big reaction, but it almost never lives up to that potential.
Econ Data / Events
GDP
3.1 vs 2.8 f'cast, 3.0 prev
Philly Fed Index
-16.4 vs 3.0 f'cast, -5.5 prev
Philly Fed Prices
31.2 vs 26.6 prev
Jobless Claims
220k vs 230k f'cast, 242k prev
Continued Claims
1874k vs 1890k f'cast
Market Movement Recap
09:14 AM Sideways to slightly weaker overnight and little-changed after AM data. MBS down 1 tick (.03) and 10yr up 2.3bps at 4.537
02:08 PM Modest additional weakness into 1:30pm. MBS down 3 ticks (.09) and 10yr up 3.7bps at 4.552
We received some anonymous feedback regarding recent rate commentary that serves as a good reminder that not everyone may be picking up what we're putting down, or worse yet, picking up things that we never put down in the first place. We spend a lot of time talking about how the bond market prices in the impact of Fed rate cuts on the occasions where those rate cuts are expected with a high probability--as was the case with yesterday's cut. Specifically, Tuesday's rate commentary said: " The market is already well aware that the Fed is cutting rates tomorrow and those expectations are already 100% reflected in the mortgage rates that are available today." The hiking/cutting of the Fed Funds rate is the only variable under consideration in that comment. The following paragraph said: "If rates rise or fall tomorrow, it would be due to other components of the Fed announcement, such as the Fed's quarterly rate outlook survey (officially, the dot plot in the Summary of Economic Projections, released concurrently with the rate announcement at every other Fed meeting) or the press conference with Fed Chair Powell that begins 30 minutes after the rate announcement." This brings us to the point because, indeed, it was definitely all that "other stuff" that caused rates to surge higher yesterday. Those who want to dig into that in detail can read the full coverage here.
Watching Rates
Check our some recent articles and posts about current rates.
The week's big story is still the big jump in rates that took place after Wednesday's Fed announcement. And while rates remain noticeably elevated on the week due to that jump, they're set to end the week at slightly less elevated levels. Credit this morning's inflation data for that development! Part of Wednesday's Fed Day drama involved a renewed focus on inflation reports. That added to anxiety because Friday's PCE inflation index is one of the two big inflation reports that come out each month. The bond market that underlies day-to-day interest rate movement is most focused on what's known as "core" inflation, which discounts the more volatile food and energy components. If month over month core inflation is running just under 0.2%, annual inflation would eventually hit its 2.0% target. Today's monthly core PCE came in at 0.1%, which was lower than the market expected. In year over year terms, there's more work to do, as PCE remained at 2.8%. The market actually expected a 0.1% increase on the annual number. In general, when reports like PCE (or its counterpoint, CPI) come in lower than expected, it puts downward pressure on rates. Today was no exception with the average lender getting back almost half of the ground lost on Wednesday. Top tier 30yr fixed rates are still over 7%, but only just.
We received some anonymous feedback regarding recent rate commentary that serves as a good reminder that not everyone may be picking up what we're putting down, or worse yet, picking up things that we never put down in the first place. We spend a lot of time talking about how the bond market prices in the impact of Fed rate cuts on the occasions where those rate cuts are expected with a high probability--as was the case with yesterday's cut. Specifically, Tuesday's rate commentary said: " The market is already well aware that the Fed is cutting rates tomorrow and those expectations are already 100% reflected in the mortgage rates that are available today." The hiking/cutting of the Fed Funds rate is the only variable under consideration in that comment. The following paragraph said: "If rates rise or fall tomorrow, it would be due to other components of the Fed announcement, such as the Fed's quarterly rate outlook survey (officially, the dot plot in the Summary of Economic Projections, released concurrently with the rate announcement at every other Fed meeting) or the press conference with Fed Chair Powell that begins 30 minutes after the rate announcement." This brings us to the point because, indeed, it was definitely all that "other stuff" that caused rates to surge higher yesterday. Those who want to dig into that in detail can read the full coverage here.
If anyone needed any further convincing that a Fed rate cut is no guarantee of lower mortgage rates, today is a great piece of evidence. Perhaps "great" is the wrong word. There was nothing great about the mortgage rate movement following today's Fed rate cut. The average lender is at least 0.20% higher than earlier this morning. Lenders are still in the process of adjusting their rate sheets, so the total damage could vary slightly by the time we're able to run the full numbers. Either way, the top tier conventional 30yr fixed rate will easily be back over 7% for the average lender. What gives? First off, the mortgage rate spike has nothing to do with the Fed's rate cut. That cut was only a small part of the information released by the Fed today. It was also the most predictable part. When something is predictable in financial markets, it can be traded, and that trading means that longer term rates (like mortgages) can move into position well in advance of Fed cuts/hikes. Moreover, mortgage rates care more about the Fed's rate cut/hike outlook than they do about one individual cut/hike. That's where things started going wrong today. The Fed communicates its outlook 4 times a year via the summary of economic projections and the infamous "dot plot" (a chart with each Fed member's view on the appropriate Fed Funds Rate at various points in the future). Today's dot plot showed the median Fed member sees much higher rates by the end of next year compared to the last dot plot 3 months ago. The following chart shows the new dots in blue and old dots in red. The year to focus on is 2025. Note the migration upward from the low 3 to high 3 percent range.
Mortgage rates have been having a much calmer week compared to last week. Monday brought a modest decline versus last Friday and today's rates are effectively unchanged. While the average lender is still noticeably higher compared to the first few days of the month, this resilience helps make a case that rates aren't eager to revisit the higher levels seen during most of November. Volatility could increase tomorrow afternoon following the Fed's rate announcement. As a reminder, the Fed DOES NOT set mortgage rates and a Fed rate cut DOES NOT mean mortgage rates will go down by a similar amount--if at all. The market is already well aware that the Fed is cutting rates tomorrow and those expectations are already 100% reflected in the mortgage rates that are available today. If rates rise or fall tomorrow, it would be due to other components of the Fed announcement, such as the Fed's quarterly rate outlook survey (officially, the dot plot in the Summary of Economic Projections, released concurrently with the rate announcement at every other Fed meeting) or the press conference with Fed Chair Powell that begins 30 minutes after the rate announcement.
