Wild Ride For Rates After Stunning Jobs Report

Interest rates take cues from several places. Regularly scheduled economic data is always a consideration because a stronger economy implies more growth and tighter Fed policy, both of which are bad for rates. Certain reports carry significantly more weight than others.  If put to a vote, the perennial top dog would be The Employment Situation (aka “the jobs report”).  Over the years it is responsible for more volume and volatility in rates than any other data.  The most recent installment came out this morning and it was a doozy. The headline number of the jobs report is a tally of new job creation reported by employers: nonfarm payrolls (NFP).  That’s just a fancy name for “jobs.”  Today’s data reported the new jobs added in January, and there were quite a bit more than expected. NFP can be fairly volatile.  It’s not uncommon to see the number deviate from forecasts by more than 100k a few times a year.  Those big deviations usually result in big reactions in rates.  Forecasts called for just shy of 200k jobs.  Today’s actual NFP number came in at a staggering 517k, thus edging out March 2022 to stand as the biggest deviation since August 2021. To some extent, the massive gains may be attributed to a seasonal adjustment process that still struggles to understand new seasonal patterns that emerged after the pandemic.  But even if we forego seasonal adjustments, the economy added more than 400k jobs per month on average over the past 12 months and the employment rate has fallen to the lowest level since the 1960s. 
Source: Mortgage News Daily

Perfect Storm Leaves Rate Range Perfectly Intact

Perfect Storm Leaves Rate Range Perfectly Intact

Coming into the week, yields were near the top of a narrow range (3.4-3.56 give or take).  With both ISM reports, the jobs report, and policy announcements from the Fed/ECB/BOE, it was a distinct possibility that we’d see that range broken.  By Thursday morning, that looked like it was a work in progress, but by the end of the day, yields were back to 3.40.  Then in a cruel twist of fate this morning, NFP beat forecasts by the widest margin in a year and half.  90 minutes later, ISM crushed its forecasts as well.  These events combined to push yields right up to the top of the range, leaving us to hurry up and wait for the next set of potential market movers.

Econ Data / Events

NFP

517k vs 185k f’cast, 260k prev

unemployment

3.4 vs 3.6 f’cast, 3.5 prev

earnings

0.3 vs 0.3 f’cast, 0.4 prev

ISM Non Manufacturing 

55.2 vs 50.4 f’cast, 49.2 prev

Market Movement Recap

09:29 AM Heavy selling after massive NFP number.  Perhaps finding footing now.  10yr yield up 11.2bps at 3.514.  MBS down 3/8ths of a point in 5.0 coupons, and half a point in 4.5s.

10:05 AM More losses after ISM data.  10yr up 15bps at 3.552.  MBS down 5/8ths of a point.

01:43 PM 10am marked the weakest levels and bonds have erased about half of the post-ISM losses.  MBS trading flat with 5.0 coupons down just under half a point.  10yr up 11.5bps on the day at 3.517.
Source: Mortgage News Daily

Big Double Whammy For Bonds, But With a Few Caveats

While we may not have a great explanation or even the capacity to believe it, nonfarm payrolls came in at 517,000 this morning versus a median forecast of 185,000.  The bond market has reacted about like you’d expect: with a large, immediate sell-off.  While that number does indeed seem very high (and it is–especially relative to the forecast), there are two caveats.
1. It doesn’t look ridiculously high in the context of the past 2 years.  

2. Today’s data was also affected by the annual re-working of seasonal adjustment factors.  This isn’t some conspiracy or deception.  The BLS (the entity that collects and publishes this data) has an established procedure for updating seasonal adjustments once per year.  The changing landscape of the post-pandemic labor market has thrown a few curve balls to revision processes such as this.  And while we can’t comment on whether this particular revision caused overly optimistic distortion of today’s number, it’s fair to say it may have helped the number be a bit higher than it otherwise would have been.  
But before you cry foul and blame BLS math for overstating the level of employment, consider that the NON-ADJUSTED numbers suggest an average monthly job gain of more than 400k over the past year (same as the adjusted numbers).  
Adding insult to injury is a significantly stronger number reported in ISM’s non-manufacturing index 90 minutes after the jobs report. The index came in at 55.2 vs a median forecast of 50.4.  That is definitely a big “beat,” and an even bigger improvement from the 49.2 reported last month, but the caveat is much more obvious in this case.  Last month really sucked and economists incorrectly guessed that today’s number would follow suit.  Here too, changes in seasonal patterns are likely contributing to forecasting errors.

Given all of the above, the 11bp sell off in 10yr yields and the half point loss in MBS seem reasonable.  Both remain in stronger territory vs last week.
Source: Mortgage News Daily

Enterprise Sales; Staffing, Compliance, Tools; Angel Oak Security; Events and Training; Surprise Jobs Number

Fun with numbers! 1: the number of Chinese surveillance balloons over Montana. (That we know of.) Did you know that the last day of 2023 is 123123? (You heard it here first!) While we’re on random numbers, Atlanta has almost 25 thousand surveillance cameras, grabbing the honors as the most heavily surveilled city in the U.S. with 50 CCTV cameras for every 1,000 inhabitants. (“The research also suggests that there is little correlation between higher camera figures and lower crime indexes.”) Shifting to mortgage-related numbers, given the Fed news this week, overnight interest rates aren’t the same as 30-year mortgage rates, of course, but moves in interest rates impact a potential borrower’s ability to buy a home in a given price range. Here’s a handy-dandy chart for LOs to help borrowers to see how rates impact affordability. With generic rates in the 6’s for home loans, LOs are keenly interested in how that compares to, say, student loan rates. Federal student loans for undergraduates currently have an interest rate of 4.99 percent for the 2022-23 school year, while grad students have interest rates of 6.54 percent or 7.54 percent for unsubsidized loans or Direct PLUS loans, respectively. Private student loan interest rates range from 2 percent to 14 percent and are based primarily on one’s credit score. Keeping with the homeowner theme, today’s podcast can be found here and this week’s is sponsored by Milestones. Giving homeowners an all-inclusive homeownership experience including home value and equity monitoring, home maintenance reminders and how-to articles, cloud-based document storage, one-click access to hire professionals for various projects around the home, and much more.
Source: Mortgage News Daily

Bonds Talked Into Modest Gains by Europe

Bonds Talked Into Modest Gains by Europe

US bond traders didn’t necessarily come into work with the intention of adding to yesterday’s rally.  It was only after European bonds exploded into stronger territory that US yields grudgingly followed–very grudgingly.  In fact, as soon as European trading wrapped up for the day, US yields rose back to meet yesterday’s 3pm closing levels.  Several big corporate bonds may have added some pressure.  We can also consider that US bonds already had a fairly big rally after the Fed yesterday.  But the simplest view would be that it didn’t make sense to get too carried away with the jobs report on deck in the morning.

Econ Data / Events

Jobless Claims

183 vs 200 f’cast,186k prev

Unit Labor Costs, Q4

1.1 vs 1.5 f’cast, 2.0 prev

Market Movement Recap

09:05 AM Flat to slightly stronger overnight.  Additional gains after ECB announcement.  10yr down 8bps at 3.34%.  MBS up 3/8ths of a point

12:51 PM Largely sideways during the domestic session, but off the best levels from earlier this morning.  10yr down 3.8bps at 3.376.  MBS up 6 ticks (.19) in 4.5 coupons and 3 ticks (0.09) in 5.0 coupons.

01:51 PM Weakest levels of the day in Treasuries with 10yr up to 3.404 (still down 1.3bps on the day).  MBS are also still slightly stronger, but more than a quarter point off the highs.

03:18 PM Not much additional weakness over the past hour.  Still slightly stronger on the day but near the weakest levels of the day.
Source: Mortgage News Daily

Mortgage Rates Back Under 6% For First Time in Months, But Just Barely

Mortgage rates responded favorably to yesterday’s press conference with Fed Chair Powell.  We discussed that move in detail in yesterday’s commentary: Fed Hikes Rates. Mortgage Rates Drop. Here’s How That Works. Now today, the average lender improved just a bit more as the Fed’s European counterpart released its latest policy announcement.  Like the Fed, the European Central Bank (ECB) hiked rates at the same pace expected by markets but delivered comments that left the bond market feeling more upbeat. In the case of the ECB announcement, it was logically the European bond market that felt more upbeat.  But there’s a certain amount of interconnectedness among the world’s leading markets, so it’s common to see spillover into US rates when something is pushing EU rates lower.   Given that US rates already experienced a fairly large move yesterday, they were somewhat resistant to the idea of going on a wild road trip toward even lower levels with their crazy European friends.  US rates were nonetheless on that trip just long enough for the average 30yr fixed rate quote to touch 5.99% for top tier scenarios.  For all practical purposes, that means mortgage rates are basically at 6% with some lenders quoting slightly lower and a few more lenders quoting slightly higher. Friday morning brings the important jobs report which has the power to push rates quickly higher or lower depending on the outcome of the data.
Source: Mortgage News Daily

Europe Driving Gains While US Bonds Resist

Today’s big story is the European bond market’s reaction to the European Central Bank (ECB) announcement.  The hike was as-expected, but the ECB also said the next rate hike is already locked in for March at which point it will reevaluate.  That reevaluation means a pivot toward smaller rate hikes followed by a pivot to no rate hikes.  And if you ask markets, there will then be a pivot to rate cuts as early as Q4 2023.  Traders see the pre-commitment for March’s hike as evidence that the dovish shift has begun.  The result is a massive rally in EU bonds–far too big for US bonds to try to match.  In fact, 10yr yields are rallying at a mere quarter of the EU 10yr pace.
The caveat is that US 10s got in quite a bit of rallying yesterday while EU bonds were already done for the day.  If we use the same 30bps of y-axis range for both, the net effect is only slightly lopsided in EU bonds’ favor.

The gains mean the prevailing range (which had bottomed out at 3.40-3.42) has been broken yet again.  This happened a few weeks ago as well, but it didn’t stick.  Things look more serious this time, so it makes sense to consider subsequent technical targets.  3.31 jumps off the page as the absolute intraday low from January 19th.  

3.25 gets the nod, and probably always will, due to its role as a ceiling level in late 2018. 
Source: Mortgage News Daily

Bidding, Credit Verification, DPA, Warehouse, Marketing, Disaster Alert, TPO Products

Happy Groundhog Day, where the rodent saw its shadow this morning, so plan on six more weeks of winter. There’s an old Yiddish proverb “We plan, God laughs.” Lots of people plan on owning a home, and will need financing. (Today’s podcast features an interview with homeowner Riley Howard about his decision why he refinanced his primary mortgage rate four times, and how he chose his lender(s).) Plenty of lenders are planning on being around to help do the estimated $2 trillion in home loans this year. Plenty of people had planned on the Federal Reserve’s Open Market Committee (FOMC) bumping up overnight rates by .25 percent (25 basis points) yesterday, and sure enough it happened. But rates dropped anyway, despite the planning and expectations, and if you want a primer on why, here you go. (Today’s podcast can be found here and this week’s is sponsored by Milestones. Giving homeowners an all-inclusive homeownership experience including home value and equity monitoring, home maintenance reminders and how-to articles, cloud-based document storage, one-click access to hire professionals for various projects around the home, and much more.) TPO Loan Products Are you looking for new ideas, products, tech solutions and training to win more purchase business? Join Rocket Pro TPO next Monday (2/6) at 2pm ET for the next IGNITE Live meeting! Register here! This monthly meeting, hosted by Executive Vice President, Mike Fawaz, is designed to deliver new and special announcements plus insights and solutions for the broker community. February’s meeting will showcase how VA lending can be a big part of your purchase strategy in 2023. Want to exceed the expectations of buyers and sellers? Rocket Pro TPO will cover virtually all of VA’s non-allowable fees: That’s Fee Freedom for VA! If you missed the last IGNITE Live, where Fawaz introduced free credit reports for brokers, watch the replay! See you next Monday for another big announcement!
Source: Mortgage News Daily

Fed Hikes Rates. Mortgage Rates Drop. Here's How That Works

For some, this will be old hat.  For others, there’s a mystifying dynamic that demands explanation.  The confusion stems from years of being conditioned to believe that when the Fed “hikes” or “cuts” rates that mortgage rates move accordingly.  That’s actually not exactly how it works. The Fed is currently in a rate hike cycle, so we’ll focus on that.  Today was the latest installment with an as-expected 0.25% increase to the Fed Funds Rate.   There are two important points in that last sentence.  First off, the rate hike was entirely “as-expected.”  That means the market was able to fully prepare for it in advance.  One portion of the market in question is that of mortgage-backed securities (MBS).  These are basically bonds that are guaranteed by pools of mortgage loans.  As investor demand waxes/wanes for those securities, the value of a mortgage changes in the eyes of investors.  This is what determines day to day mortgage rate movement above all else. The Fed only has 8 scheduled meetings to hike/cut rates per year whereas MBS can move as frequently as they want on any given business day.  All that to say that if the market knew the Fed would hike 0.25%, it has long since been baked into MBS prices as well as the rest of the bond market. The second important point is that the Fed deals with the “Fed Funds Rate.”  This is a target range for the shortest-term lending among large financial institutions.  The easiest way to think of it is like the Fed setting the rate of return on a savings account.  The higher it is, the more banks will park money there and the higher rates they must charge other banks and clients to borrow money (otherwise it makes more sense to just park the money in the bank and earn that interest).  
Source: Mortgage News Daily

Markets Surprisingly Surprised by Unsurprising Powell Comments

Markets Surprisingly Surprised by Unsurprising Powell Comments

We were pretty sure we knew what Powell would generally say in today’s press conference.  He turned out to be generally predictable.  After all, there are really only two things the Fed can think or say right now: A) still need to see more progress on inflation and B) data will determine when our job is done.  Despite Powell’s unsurprising comments, the market was apparently surprised (or relieved?).  This is surprising considering the simple list of routes in the Fed playbook.  Perhaps it’s as simple as the market being overly prepared for a Hawkish smackdown from Powell and instead getting a logical approach.  

Econ Data / Events

ADP Employment

106 vs 178 f’cast, 253 prev

ISM Manufacturing

47.4 vs 48.0 f’cast, 48.4 prev

ISM Prices

44.5 vs 39.4 prev

Job openings and labor turnover survey (JOLTS)

11.012 vs 10.44 mln prev

Market Movement Recap

08:38 AM Flat in Asia.  Slightly stronger in Europe.  Additional gains after ADP Employment data.  10yr down 4bps at 3.472.  MBS up nearly a quarter point.

10:24 AM Weaker into and out of the 10am data.  Still stronger on the day, but at weakest levels.  MBS down 1 tick (0.03) in 5.0 coupons.  10yr down 1.3bps at 3.499

12:09 PM Decent recovery now.  MBS up at least an eighth in 5.0 coupons.  10yr down 3.5bps on the day at 3.479.

03:11 PM Almost exclusively positive in response to the Powell press conference.  10yr down 11bps at 3.402 and MBS up half a point.
Source: Mortgage News Daily