Insights from the Mortgage Market: Key Takeaways from June 26, 2024

Bond Market Hints at Trend Shift

Over the past ten days, the bond market has shown little movement when mapped against Treasury yields. During U.S. trading hours, yields have largely remained between 4.21% and 4.29%, briefly touching but not breaking past these levels. The 4.29% ceiling has seen more action, culminating in a modest breakout today with yields finishing just under 4.32% at the 3 PM close. However, this movement wasn’t driven by major, influential events typically noted in bond-watching strategies. Factors like potential currency intervention by Japan and high inflation in Australia, while notable, pale in comparison to significant U.S. economic indicators expected soon, such as this Friday’s Personal Consumption Expenditures (PCE) report and other key data in early July. Any significant trend shifts will likely stem from these forthcoming reports. For now, the current market behavior represents a minor setback rather than a major trend alteration.

Economic Data and Events:

– New Home Sales: 619k versus a forecast of 640k, down from a previous 698k.

Market Movement Recap:

– 10:08 AM: Experienced moderate weakness overnight with additional selling around 9:15 AM.

Navigating the Ever-Evolving Mortgage Market: Key Insights for 2024 and Beyond

Do you think you’re doing exceptionally well as a lender? If so, you’re not alone. The majority of lenders are enjoying profitability, driven by cost-cutting measures and income from servicing, as well as the exit of unprofitable companies. According to the latest MBA Performance Report, 59 percent of mortgage banking companies turned a profit in the first quarter.

However, the same can’t be said for our government’s financial status. The Congressional Budget Office forecasts the federal budget deficit to balloon to around $1.9 trillion this year, up from an earlier estimate of $1.5 trillion. This increase reflects higher spending on student loans, Medicaid, and a recently approved $95 billion foreign aid package. The national debt is projected to exceed $56 trillion over the next decade, equating to 122 percent of GDP, which is even higher than the 106 percent ratio post-World War II in 1946.

On the other side of the Atlantic, the eurozone is grappling with its own fiscal challenges. The European Central Bank has issued warnings to eight of its member states, including Belgium, France, and Italy, about their excessive budget deficits.

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In short, recent economic figures this morning promptly offset the frailty observed following the Federal Reserve’s statement yesterday, effectively reinstating the lowest interest rates achieved post the Consumer Price Index (CPI) data yesterday.

Of greater bearing is likely today’s core Producer Price Index (PPI) that records a massive beat having registered 0.0 compared to the anticipated 0.3. Jobless claims exceeding 240,000 have played their part, although there exist some reservations regarding the seasonal adjustment factors due to the manner in which raw data has seeped into adjusted data over the preceding two years.

Specifically, there is a noticeable spike and subsequent fall in numbers for the months of July/August which is apparent in raw figures and strangely enough, also in the adjusted figures. This indicates an inclination of potential exaggeration in the hike in claims observed today, based on the adjustments applied.

These lingering uncertainties may be influencing the bond market’s wavering conviction regarding the speed of this morning’s rally. Regardless, it appears as though yields have established a firm baseline when attempting to better yesterday’s peak levels.

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Tuesday’s trading session notably outperformed and was significantly more engaging than that of Monday’s rather dull one. The bond market showed more verve and movement closer to recent averages, accented by volatility guided by data. Notably, volatility isn’t always predictable, but this time it favored investors as S&P PMI results for both Manufacturing and Services sectors underperformed expectations. This wasn’t an earth-shattering shift, but certainly a more significant sway than what we observed on Monday. Interestingly, even before this data was revealed, yields were steadfastly bobbing below the 4.65 technical level. This merely secured the existing trend of lateral movement that’s been observed since mid-last week.

Key Economic Data and Events:

– The S&P Services PMI came in at 50.9, compared to a forecast of 52.0.
– The S&P Manufacturing PMI recorded a figure of 49.9, under the anticipated 52.0.

Market Movements Recap:

– At 09:58 AM, despite weaker overnight figures, losses were compensated following the PMI data. The 10-year yield was down 2.6bps at 4.584. The MBS showed no change in 6.0 coupons, but was up 6 ticks (.19) from the lowest record.
– By 10:31 AM, MBS had come up to speed with the rally, standing 5 ticks (.16) higher. The 10-year yield saw a fall of 3.2bps, reaching 4.578.
– At 01:12 PM, a strong 2-year auction brought the market near its best levels. The 10-year yield hovered at 4.573, down by 3.7bps. The MBS noted an upward shift of 6 ticks (.19).
– At 03:25 PM, the best levels experienced a minimal drop, with MBS up by an eighth on the day. The 10-year yield fell by a minimal 1bp to 4.60.

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Economic data from recent events continues to maintain the status quo in the bond market. A surface level view might suggest that significant catalysts for momentum are absent, yet on a more in-depth analysis, it’s observable that bonds were notably more robust prior to this morning’s data release. The weak start could be incidental, but the reaction post-9:45am to the PMI data was unmistakable in terms of trade volume and market turbulence, despite it mainly aligning with predictions. Some experts point towards the rising “confidence” index at a 22-month peak in the services domain as the primary cause. Meanwhile, the market’s attention is steadily turning towards the PCE data set to be announced next Friday.

Regarding other specific Economic Data/Events, there were significant changes like – the Philly Fed Index jumped to 3.2 from the forecasted -2.3, and the previous 5.2. Also, the Jobless Claims decreased to 210K against the projected 215K, and Continued Claims witnessed a minor increase. The S&P Services PMI stood at 51.7, slightly below the forecast.

The market movement recap indicates fluctuations in the 10-year rate and the MBS. Despite these changes, the overall market remained stable, displaying very minimal shifts throughout the day.

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The Federal Reserve is facing a challenging predicament due to consecutive months of stubborn inflation data that doesn’t align with the preferred trajectory. Ideally, core inflation would have continued to fade as witnessed in 2023, but it remains above a level that would give the Fed reassurance of a return to a 2% rate. This divergence is likely to be addressed in different ways and particularly during the press conference.

Another key concern is the planned Federal rate reductions for 2024. Originally, three cuts were anticipated in December while market observers are still forecasting between 2 to 3 reductions. Much attention will likely be paid to the dot plot because of this. The market is perhaps over invested in the Fed’s inclination to adjust the Fed Funds Rate earlier than projected. While it was more open to embracing this idea when core inflation was below 3% and decreasing, it is now nearing 3.5% and increasing. This shift in tone in connection with the dot plot and press conference will certainly be a key point of focus.

Regarding the dot plot, while the inflation trend hasn’t significantly transformed since December, there has been a shift across several consecutive reports. It’s entirely plausible for an average Fed member to foresee one fewer cut by the year-end, subsequently moving the median dot up by 0.25.

However, should the Fed remain optimistic about inflation, and only half the dots move up by 0.25, the median would still increase by the same amount. The diagram illustrates how, even with half of each row moving up by 0.25, the median would still shift in the same direction. As a result, several Fed members would need to raise their forecast by more than 0.25 to move the median beyond 0.25.

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Just before the 4pm mark, Mortgage-Backed Securities (MBS) have seen a slight drop of 6 ticks (.19), while 10-year yields have increased marginally by 6 basis points, trading close to 4.16. This implies the resilient state of the bond market, which has managed to retain all the gains from the recent highs until last Tuesday. Barring the moderately weak performance, the bond market’s endurance should be admired, especially taking into account the Core CPI registering at 0.4% for consecutive months. Also noteworthy, the previous CPI report triggered a jump in 10-year yields to over 4.3.

Minor adjustments rounding down the exact figure of 0.358 to 0.4 and a favorable decrease in the troublesome OER from 0.6 to 0.4 has provided an advantageous scenario for bonds. This even led to a breakeven point for bonds early in the day. A certain waning strength could be credited to the imminent 10-year Treasury auction.

Economic Data / Events showed Core Consumer Price Index (CPI) month on month at 0.4 compared to a forecast of 0.3 and the previous figure of 0.4. On a year on year basis, the Core CPI was reported at 3.8 versus a forecast of 3.7 and the previous figure of 3.9

To recap the market movements, at 08:48 AM there was a paradoxical reaction to CPI with a slight drop in 10yr down 0.4bps at 4.094. Meanwhile, MBS showed an uptick of 3 ticks (.09). By 09:35 AM, the market had reversed the gains convincingly, with 10yr yield up 4.9bps at 4.147 and MBS falling by 5 ticks (.16). At 01:06 PM, the weakest market levels emerged after the auction with the 10yr yielding up 7.2bps at 4.17 and MBS falling by a quarter point. By 03:47 PM, the market was seen moving slightly away from the weakest levels and remained stable during post-trading hours with MBS still down 6 ticks (.19) and 10yr yield up by 6bps at 4.157.

“Analyzing the Steady Performance of MBS Amidst Market Fluctuations: A Recap from March 06, 2024”

The bond market experienced an intriguing day with yields declining to its lowest in over three weeks, despite several noteworthy influences. Notably, most of this improvement seemed detached from these influences, leaving them with little credence. The occurrence of job opening data (JOLTS) and a testimony from Powell marked the day, the most conspicuous market influence being a chain of headlines and trading stops revolving around NYCB, although these eventually nullified each other. Consequently, we witness a humble yet significant advance preceding Thursday’s ECB announcement and Friday’s employment report.

Economic Data and Events:

ADP Employment – Recorded at 140k compared to the predicted 150k; it’s previous mark was 107k.

Job Openings – Showed a count of 8.863m against a forecast of 8.9m, a decline from the earlier 9.026m.

Market Movement Overview:

09:00 AM – Mildly weaker overnight movement with gains initiating at 7am. A 2.8bps decline in the 10yr yield at 4.123, MBS marking an increase of 8 units. No significant impact noted from ADP and Powell’s remarks.

10:01 AM – Muted response to JOLTS with 10yr declining 4.7bps to 4.104 and MBS rising 9 ticks (.28).

12:31 PM – Augmented gains due to NYCB’s circuit breaker at 11:53am ET. MBS up to 10 ticks (.31) with a 6bps drop in 10yr yield landing at 4.092.

02:50 PM – Noticeable volatility resulting from NYCB headlines. A retreat of MBS from highs, marking a quarter point rise for the day; 10yr experiencing a fall of 4.3bps, ending at 4.108.