After dominating the news cycle for weeks, the debt ceiling issue is suddenly resolved and the bond market doesn’t seem to care. The jobs report proved to be far more relevant, but with half of it indicating a much stronger labor market and the other half saying the opposite, who’s telling the truth and why did rates only pay attention to the bad (good) news? Let’s take one paragraph to put the debt ceiling to bed. Last week’s newsletter went into more detail on its relative unimportance–now confirmed by the absence of any major reaction after this week’s Senate passage (and imminent signing this weekend). The following chart is potentially confusing, but it attempts to show one line that only cares about non-debt-ceiling stuff (the green one), one line that cares a great deal about the debt ceiling (the red one), and finally, the blue line of 10yr yields to serve as a proxy for longer-term rates. Bottom line: if the blue line correlates more with the green line, the debt ceiling wasn’t a big deal for rates. On to the jobs report! This month’s installment showed much stronger job creation with payroll counts at 339k and more than 90k of upward revisions to the last 2 months. Analysts were expecting less than 200k. Super strong! This month’s installment also shows the unemployment rate ticking up to 3.7% from 3.4% last time, handily outpacing the 3.5% forecast. Occasionally, movement like that happens when the labor force participation rate changes, but it was perfectly steady this time. In other words, this is the opposite of super strong!
Source: Mortgage News Daily
What Debt Ceiling? Yields Follow NFP Higher
After being utterly bombarded for weeks, newswire feeds at trading terminals are suddenly devoid of debt ceiling headlines. To be fair, there have been a few mentions of final approval set for this weekend, but markets moved on long ago. If there was any reaction in longer term rates, it played out by Tuesday night. Today’s sell-off was all about nonfarm payrolls. Today’s AM commentary has all of the charts and discussion on that topic. Today’s recap is just here to let you know bonds continued selling into the afternoon with 5.0 MBS losing almost half a point.
Econ Data / Events
Nonfarm Payrolls
339k vs 190k f’cast, 253k prev
Unemployment Rate
3.7 vs 3.5 f’cast, 3.4 prev
Participation rate
unchanged at 62.6
Earnings
0.3 vs 0.4 f’cast, 0.5 prev
Market Movement Recap
08:53 AM flat overnight. weaker after jobs data. 10yr up 3.8bps at 3.639. MBS down roughly a quarter point.
10:36 AM recovery attempt until 9:30am. Weaker since then. MBS down 3/8ths. 10yr up 6bps at 3.662.
03:35 PM Additional selling into the PM hours and flat since then. 10yr up 9bps at 3.689. MBS down just over 3/8ths.
Source: Mortgage News Daily
Nonfarm payrolls were up 339k, well above the 190k forecast. At the same time, unemployment rose from 3.4% to 3.7%, well above the 3.5% forecast. How can these two numbers coexist and how does the market decide which one to believe?
The first thing to understand about “the jobs report” is that it is comprised of two separate data collection efforts. One is a survey of regular old people that relies on individual responses (aka “household survey”). The other is a more formal, more systematized reporting of the number of payrolls at various employers (aka “establishment survey”).
The unemployment rate is derived from the household survey and nonfarm payrolls (NFP) comes from the establishment survey. In today’s data they gave two completely different messages with NFP coming in at 339k vs forecasts calling for 190k and a previous reading of 253k (revised up to 294k). That’s a very strong showing.
But unemployment told a different story, rising to 3.7% from 3.4%–a fairly big jump relative to what we usually see.
So who’s lying?
These two data collection efforts are absolutely massive. They are also highly regarded in terms of data integrity. In other words, the average investor has complete confidence that the Bureau of Labor Statistics is publishing the exact same data it collects.
Issues arise for a few reasons (sampling error, changes in seasonal adjustment factors, etc), but let’s focus on the simple issue of “noise.” Sure, NFP was much stronger, but it continues to trend lower.
One other way to capture this trend would be to use a moving average:
The chart above begins to clue us in to another big issue for this data: the labor market is still very much in the recovery phase from a truly unprecedented shock. How unprecedented? It’s easy to appreciate when we zoom out to include the full scale for the chart above:
In other words, NFP and U/E (unemployment) are still finding themselves after being lost in the woods.
So why is the bond market weaker today if unemployment went higher? That’s a simple answer: market participants trust NFP much more than U/E to be a generally better early indictor of broad shifts in the labor market. Charts show why. Take the dot com recession as the first example of NFP clearly leading the way lower well before U/E. NFP bottomed almost 2 years earlier and peaked almost 3 years earlier on the other side of the recession.
Similar patterns hold true for the adjacent economic cycles.
What about some quick and easy explanation for the divergences in today’s data? Could it be that an excess of multiple job holders inflated NFP (every job they have counts as a payroll). And could this in turn mean the labor market is weaker than it seems? Probably not. The multiple jobholder category actually tends to rise when things are going well for the labor market, despite all the spin suggesting otherwise.
Moreover, as a percentage of the total, there’s not even a clear trend when it comes to multiple jobholders and economic cycles.
Source: Mortgage News Daily
While lenders are grappling with steadily increasing Agency repurchase requests, it’s National Donut Day! Someone had better offer those folks at State Farm Insurance a donut… maybe they’ll change their mind about cutting off insuring properties in California. Three thousand miles away, I wonder if Florida home owners should be happy of even having insurance despite it being four times cost of the national average. And good luck insuring anything built near the coast prior to 1992’s Hurricane Andrew. While we’re on the topic of Mother Nature and economics, it’s fine for the Biden Administration, or any politician, to call for more affordable housing, but what about where’s there’s no land or a community limiting development due to running out of water like in Phoenix!? (Today’s podcast can be found here and this week’s is sponsored by Lenders One, one of the largest mortgage co-ops in the country with a diverse mix of 250+ member companies and providers of an end-to-end solution independent mortgage professionals trust to drive profitability and growth. Listen to an interview with nCino’s Ali Maquet and Brett Dooies on why experience-driven automation should matter to financial institutions.) Lender and Broker Products, Software, and Services It’s time to schedule your firm’s 2023 MERS Annual Review and e-Annual Report with TENA! Every MERS member is required to complete a MERS Annual Review. If on March 31, 2023, your firm’s count of active MINs was 1,000 or more, then the 2023 MERS Annual Review for your firm must be completed by an independent third party, with the results submitted to MERS not later than December 31st. For significant savings, sign up early for a MERS Annual Review and provide TENA with all of the necessary documentation by August 31st. Avoid the last-minute rush! To ensure that your firm is in compliance, contact TENA today to initiate your firm’s 2023 MERS Annual Review. TENA also offers a full range of MERS reviews, including MERS Data Reconciliation and MERS Document Reviews. TENA Companies, Inc. has been the mortgage industry’s trusted source for Mortgage Quality Control Audit Services and Software since 1982.
Source: Mortgage News Daily
Data-Driven Rally, But There’s Bigger Data Ahead
Yesterday’s economic data made for a bit of back and forth in the bond market with Fed speakers ultimately riding to the rescue by forwarding the notion of “skipping” a rate hike at the upcoming meeting. Today was a bit different with the AM econ data largely coming across in a bond-friendly manner. This was especially true of Q1 unit labor costs which missed estimates by a wide margin. Traders have increasingly moved on from debt ceiling headlines and are now turning their attention to Friday’s jobs report as casting the tie-breaking vote on whether this week’s events merit a return to the previous 3.4-3.6 range in 10yr yields.
Econ Data / Events
Challenger Job Cuts
80.1k vs 92k f’cast
ADP Employment
278k vs 200k f’cast, 296k prev
Jobless Claims
232k vs 235k f’cast, 229k prev
Q1 Labor Costs
4.2 vs 6.3 f’cast, 3.3 prev
ISM Manufacturing
46.9 vs 49.8 f’cast, 50.2 prev
ISM Prices Paid
44.2 vs 52.0 f’cast, 53.2 prev
Market Movement Recap
08:27 AM slightly weaker after am data. 10yr down half a bp at 3.65. MBS down just over an eighth, but illiquid.
09:09 AM Nice bounce back after 8:30am data. MBS up nearly a quarter point and 10yr down 4.4bps at 3.601
02:49 PM MBS at best levels with 5.0 coupons up 3/8ths. 10yr down 4bps at 3.605
Source: Mortgage News Daily
Bonds had been hoping for econ data to reinforce a ceiling after a recent run to the highest yields in months and the past few days have delivered. The resilience has drawn both on the data and on several Fed speakers forwarding the notion of “skipping” the rate hike on June 14th. All this despite the debt ceiling deal passing the house and likely to pass the Senate more easily. Today’s contribution comes from a big miss in Q1 labor costs (4.2 vs 6.0 f’cast) and a big drop is ISM Manufacturing “prices paid.”
Bonds definitely aren’t stampeding toward lower levels, but they’re definitely shying away from last week’s ceiling. The next challenge will be a definitive break back into the previous trading range–something that would probably require downbeat data in tomorrow’s jobs report.
Source: Mortgage News Daily
The United States has about 336 million people. Did you know that 1/3 of them live within a 500-mile radius of Nashville? This is a cool site for anyone putting together a sales presentation for a real estate agent or a borrower. Speaking of geography, Wyoming has 23 counties, not 58 as the Commentary mentioned yesterday, further proof that this is, and always will be, produced by human hands! (Thank you to everyone who corrected me on that.) While we’re on selling, from a sales perspective, some LOs advocate adding value by subtracting complexity for clients. They are asking themselves, “How do I add value? How am I any different?” They are looking at their sales pitch, comparing bringing up pain (minimizing pain through minimizing paperwork) versus bringing up pleasure (“You’ll save time by working with me.”) And most are doing what they say they’re going to do: If you tell a potential client you’re going to call in two days, call in two days. Simple. Now go get ‘em! (Today’s podcast can be found here and this week’s is sponsored by Lenders One, one of the largest mortgage co-ops in the country with a diverse mix of 250+ member companies and providers of an end-to-end solution independent mortgage professionals trust to drive profitability and growth. Listen to an interview with Lenders One’s Justin Demola on the member benefits of joining a national alliance of independent mortgage banks, banks, and credit unions.) Lender and Broker Products, Software, and Services
Source: Mortgage News Daily
After hitting the highest levels in several months last Friday, mortgage rates have fallen fairly quickly in the new week. As bond markets improved this afternoon, many lenders were able to make mid-day adjustments. That brought the average top tier 30yr fixed rate down to the lowest levels since Thursday, May 18th (not QUITE 2 weeks, but close enough!). The credit for the rate reversal is multifaceted. The move began in Europe where friendly inflation data added to an even sharper drop in rates. As is often the case, European rate momentum has an effect on US rate momentum. Traders are also feeling more confident about re-entering the market for US Treasuries–the foundation of interest rates in the US–as the debt ceiling debate progresses. If there’s one important takeaway, however, it’s that the next big move for rates remains up for debate. Upcoming economic reports will set the tone for the Fed meeting in 2 weeks. Several Fed officials commented that they were thinking about “skipping” a rate hike at the upcoming meeting. Others have recently said they would like to hike again. Both sides of the debate may change their minds by June 14th, depending on the data. The Fed doesn’t directly set mortgage rates, but when a Fed rate hike is hotly debated, the Fed’s decision can have a bigger impact than normal. Moreover, the market will be trying to adjust to what it perceives as the Fed’s likely course of action based on the outcome of economic reports between now and then. The only surefire bet is for more volatility. It has just happened to be friendly volatility so far this week.
Source: Mortgage News Daily
Domestic Events Mostly Overshadowed by European Influence
While we can trace some of this morning’s back and forth market movement to domestic economic data (Chicago PMI helped, JOLTS hurt), it was the European market hand-off that set the tone for today’s US rate rally. The only major contribution from a domestic standpoint would be several Fed speakers hitting the wires talking about “skipping” the next rate hike at the upcoming meeting.
Econ Data / Events
Chicago PMI
40.4 vs 47.3 c’cast, 48.6 prev
Job Openings
10.1m vs 9.2m f’cast, 9.6m prev
Market Movement Recap
08:53 AM decently stronger overnight, but losing ground since 8:20am. MBS still up 1 tick (0.03) in 5.5 coupons and 5 ticks (.16) in 5.0 coupons. 10yr down 2bps at 3.673.
11:37 AM Some back and forth surrounding AM econ data. 10yr down 4bps at 3.654. MBS up a quarter point.
03:03 PM Additional gains in the PM hours. 10yr down 5.3bps at 3.641 and MBS up 3/8ths of a point.
03:53 PM Best levels of the day with 10yr down 7.8bps at MBS up half a point.
Source: Mortgage News Daily
The big news so far this week is the absence of any concrete conclusion to the debt ceiling debate (delivered in box labelled “debt ceiling debate solution”). The solution would effectively be to punt on actual decisions until after the next presidential election, but that still requires some agreement in the short term. That agreement is yet to be realized, and bonds are catching a bid as a result of the uncertainty. Chicago PMI and JOLTS data took turns pushing yields lower and higher (in that order) this morning, but neither move stuck.
We’re left with resilience around 3.686% and resistance around 3.646% so far today:
Those moves quickly get lost in the shuffle when we zoom out a bit. Perhaps even more importantly, we’re left with a new takeaway: European bonds have been rallying sharply so far this week, and this is as good an explanation as any for this week’s rally momentum in US bonds.
Source: Mortgage News Daily
