This is Matt Graham with the MBS Live Market Update. The market continues to be defined by developments in the Iran war, and Wednesday ended up being by far and away the most interesting day of the week last week for rate movement, thanks to headlines suggesting the US and Iran were close to signing a one-page memo to end the war. Why are we talking about a memo? Simply put, a more formal peace agreement will be a lot longer than one page and will take a lot more time to hash out. If parties can agree in principle on the ultimate details, it allows the war to end immediately rather than wait for that more formal agreement. In other words, the market will basically view that one-page memo as the end of the war, even though The complete details would still need to be fleshed out. So why did rates like that news? Pretty simple. Rates are, of course, based on bonds. Bonds hate inflation. In other words, higher inflation equals higher rates, all else equal. So logically, higher fuel prices lead to higher prices for anything transported by fuel, which is just about any physical good. And of course, the war has been responsible for a huge surge in oil prices. Thus, ending the war should result in a relatively lower oil price and inflation and rates. Wednesday’s news prompted a drop of more than $10 a barrel in oil prices, taking them well below the key $100 level. Bond yields dropped almost 10 bps, with the 10-year hitting the 4.34% technical level. When bond yields are dropping, mortgage rates are usually following. Wednesday was no exception, with the average lender moving 10 bps lower from 6.54 to 6.44, and that’s for a top-tier 30-year fixed scenario, according to the MND Daily Rate Index. All told, rates dropped 14 bps on the week versus last Friday’s highs. What about the jobs report? We did have one last week, and there would normally be quite a lot to say about it, but in this case, it didn’t move the market in a significant way. That’s stunning, considering the payroll count came in at 115k versus a median forecast of 62k. At almost any other time in history, that would be a surefire recipe for a rapid rate spike. But labor market dynamics have been changing in a way that makes the payroll count more of a moving target compared to the unemployment rate, which is another statistic from the same jobs report and the unemployment rate came in right in line with expectations at 4.3%. In fact, when we adjust for the labor force participation rate, it’s more like the unemployment rate actually rose by a tenth of a percent. With that, the bond market really had no reaction to the jobs report, and if anything, it was slightly friendly. That is definitely a break from past precedent, and this dynamic has really been getting more and more prevalent since last November when the labor force began shrinking. But as long as the war continues, economic data has sort of been in the back seat, and we had more war-related news over the weekend. Heading into the new week, bonds are moving back up in concert with oil prices after Trump voiced strong disapproval of Iran’s counterproposal, which they sent late last week. The reversal has not yet fully undone last week’s gains, but we’re now more than halfway back to the level seen before Wednesday’s memo news. Key data points this week will be CPI on Tuesday. That’s the Consumer Price Index, a key inflation metric and the one that tends to have the most potential to move the market. And then to a far lesser extent, PPI, the Producer Price Index, will also speak to the evolution of war-related inflation on Wednesday. That’s going to do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
Matt began as an originator in 2002. He fell in love with the idea of following MBS in real-time but felt that existing products were only scratching the surface. Thus was born MBS Live in 2007, the first-of-its-kind platform with real-time market data/analysis, and live chat with analysts, traders, and originators around the country. He is currently the Founder and CEO of MBS Live!
He’s been covering bond/mortgage markets, writing commentary, alerts, and chatting with the live community every business hour of every business day ever since.
Matt also serves as the Chief of Operations for mortgagenewsdaily.com, where he is one of the industry’s most respected mortgage rate experts, frequently quoted in the media. Mortgage News Daily’s rate index is used as the definitive resource on day-to-day mortgage rate averages.
He lives in the Pacific Northwest with his wife and son where he enjoys skiing, fishing, coaching youth sports, playing the guitar, and more DIY projects/hobbies than he’d care to admit.