Prices end near last week’s highs after data swings to fences

One of the most reliable sources of fluctuations in interest rates is the Labor Department’s large monthly jobs report (officially the ‘Employment Situation’).While this was very easy to notice before the pandemic, major economic reports are getting increasing attention as the market looks for evidence of Inflation and tighter Fed policy are negatively affecting the economy.

A weaker economy creates less demand for goods and services. This serves two purposes for interest rates.

  1. Lower economic growth increases the attractiveness of safe haven investments such as bonds. Excess demand to buy bonds pushes prices down.
  2. Lower demand can help lower prices, and thus help cool inflation. Inflation is an enemy of low rates, and a major reason for the more hawkish Fed policy that maintains upward pressure on prices. So if inflation goes down, rates will go down, all other things being equal.

All that can be said: What is bad for the economy is usually good for rates.

Several recent reports have already shown clear signs of economic downturn. This is the main reason why interest rates hit new long-term lows last week. But this is a new week, and the two largest economic reports were weak.

swinging for fences.

In the week many sports fans fondly thought of the late Finn Scully’s famous call “high ball in the right field” during the 1988 World Championships, two of the most economic hits reports were also swinging for the fence.

The highly regarded indicator of the services sector (ISM Non-Manufacturing PMI) was ranked first. You painted a picture of an economy that was anything but contraction in July. Of particular note is the “business” component of the data, which peaked at its best in 2022. More importantly, it provided a stark contrast to recent readings that were among the worst in over a decade (despite months of lockdown) .

What about the big jobs report? After last month’s report showed 372K jobs created, the median forecast for the July numbers (released this week) was just 250K – a real write-off from the past few reports. But the number of salaries is highly correlated, coming to 528 with an upward revision to 398 thousand for the month of June. Wage growth also beat expectations at 0.3%, coming in at 0.5%, also with an upward revision to the June figure.

To reiterate, strong economic data is bad for rates, and these two reports were very strong. Together, they acted as a double whammy that sent 10-year yields and mortgage rates back to their highest levels last week.

20220805 nl2.png

Higher Mortgage Rates? How about 4.99%?!

News stories spread with the headlines announcing a surprise return to rates below 5% on Thursday. Regular readers know this is old news given our discussion about the availability of lower prices last week. So what’s new in this week’s news?

As with many frustrating mismatches between average headlines and actual mortgage rate availability, this one also occurred due to overreliance on Freddie Mac’s weekly mortgage rate survey.

Freddy’s Survey is the longest and most established catalog of historical mortgage rates in the industry. It has become well established for a reason, and it does a good job of tracking broad changes over time – especially in the absence of a lot of volatility. But for the purposes of understanding where prices are on any given Thursday, Freddy’s survey is unacceptably meaningless – especially in times of increased volatility.

Why is it so old?

The official poll response window runs Monday through Wednesday, but the vast majority of responses are by Monday. Freddy has officially stated that most responses are received on Tuesdays, but that is either incorrect or those responses come early Tuesday morning before lenders update their rates for the day. If there’s any report confirming it, it’s this week! Here is the reason:

20220805 NL7.png

The chart above shows minute-by-minute movement in mortgage-backed securities, and the primary components that determine the rates that mortgage lenders can offer (for those familiar with MBS rates, the line above has been flipped so that it moves higher as rates rise and vice versa).

In short, this week’s poll window landed at the absolute bottom of this week’s rate range (a low that only lasted hours). Moreover, it was measured against the absolute top of last week’s range, making the biggest weekly decline that can be recorded.

None of the above is bad in itself. If prices hadn’t moved much after Tuesday morning, 4.99% would have been close enough to reality – especially after factoring in the additional upfront costs (i.e. “points”) included in the survey. But as we know – due to the above chart and an initial look at the reaction to the economic data, prices rose significantly by Friday.

The bottom line on prices: Prices were much lower earlier this week, but quickly returned to levels in line with last week’s highs. By the way, Freddy was going to have a breather due to the strong performance of the bond market on Thursday, but Friday’s jobs report completely wiped out that improvement (hence the “W” pattern in the daily rates below)

20220805 NL6.png

Eternal Disclaimer on Price Indicators: There are always many factors that can influence any individual quote. Broad indicators such as Freddy’s weekly mortgage rate survey or the above “actual daily average” are drawn from best-case scenarios – sometimes with a certain amount of the initial cost (“points”) implied.

Additional Disclaimer on Points: “Point” is a term referring to one percentage point of the loan balance paid up front in order to receive a lower rate. This additional cost is not always exactly one point. It could be more or less. But the point about these points at this point in mortgage rate history is that they pack a much bigger punch than usual.

Mortgage rates dropping at record pace “data-contentid =” 62e4416fe3232a3b3c136454 “data-linktype =” newsletter ” rel =” noopener “> We talked about why last week, but the bottom line is that there’s not much difference between a mortgage rate of 4.99% and 5.5% + as history suggests. In the past, these two rates were separated by at least 2 points. At the moment, it’s less than 1 in most cases. This not only leads to more volatility in daily price tracking, but also means that quotes More diverse as some lenders advertise pips while others don’t.

Coming next week: If the strong jobs report gives us something to talk about this week, understand that jobs data has been as remotely relevant as the Consumer Price Index (CPI) in terms of bond and interest rate expectations in the past couple of months. Need a guide?

20220805 nl5.png

The chart above is a bit crowded, but the goal is to show the strength of the CPI to move shorter and longer-term price expectations more easily from jobs data. Do you need proof that rates like 10-year Treasury yields move in concert with the Fed’s long-term rate hike expectations? (There is no axis dedicated to the orange line below, but the annotations show relevant peaks and valleys):

20220805 nl3.png

All to say “CPI is important”. Next Wednesday (August 10) comes with one of two instances of CPI data that the Fed will consider before deciding on a rate hike path at the September meeting. There will be other economic data as well, but none will have the same amount of potential to cause a stir – for better or worse.

%d bloggers like this: