This is Matt Graham with the MBS Live Market Update. As of nine forty-four AM last Wednesday, the bond market’s game plan was mostly about waiting for this week’s economic data. But then at nine forty-five AM, everything changed after a highly unlikely market mover. The report in question was the S&P Global Purchasing Managers Index, or indices, since there were two of them, and these measure business activity in the manufacturing and services sectors. They are almost never a major cause of rate movement. But this time around, both readings blew past expectations by the widest margin in years and reached their highest levels in years. Companies also reported input costs rising at the fastest pace in almost four years, with selling prices and employment picking up as well. Bond traders began selling as soon as the numbers came out. Ten-year Treasury yield jumped through five percent and selling continued well beyond the first reaction. That was the week’s only economic report with any reasonable connection to this week’s economic data and that is specifically connected to the ISM PMIs. But it can also simply speak to economic strength in general, which could have a bearing on job openings and the jobs report, which will come out this Friday. But the question again is why did this market suddenly care about a report that it usually shrugs off completely? We can count on one hand the number of times that S&P PMIs have had any detectable market reaction, let alone a huge one like we saw last week. In short, the September Fed meeting put traders on the edge of their seats. Specifically, it was Fed Chair Warsh’s press conference in which he suggested more rate hikes were coming. After that, traders began worrying the market was maybe behind the curve in pri– in terms of pricing the potential policy path and economic strength in general. Since then, several other Fed speakers have suggested that the recently updated rate outlook via the dot plot could prove to be too low if the economy keeps strengthening or if inflation turns out to be more demand-driven. Wednesday’s S&P PMI pushed on both of those nerves at the same time because it raised the risk that this week’s econ data, which again, these are the reports that really matter, could be similarly strong. And it’s also worth noting that it was just the latest in a series of unpleasant surprises for the rate outlook that began in earnest at the late August Jackson Hole speech. Jackson Hole kicked that off. Then we had the two inflation reports suggest a higher Fed rate path, and then we had the Fed announcement itself, and now S&P PMI. After each of those events, we’ve seen the implied yield for the Fed funds rate jump sharply higher. Over the course of just that month, the rate expectation for June of next year has jumped from roughly four point two all the way up to four point eight, which is more than two additional Fed rate hikes during that time. All that having been said, we still would not have expected Wednesday’s PMI to really have as big of an impact as it had if it wasn’t just at the precisely right place at the right time, and perhaps capturing a market sentiment that hasn’t previously been captured in the way bonds have been trading. This is what we refer to, and maybe others too, as a repricing of the rate outlook. A sudden widespread rethink of how many Fed hikes might be needed and how soon, marked by sharply higher bond yields and mortgage rates. It’s basically a mini Pandora’s box of upward pressure on rates with self-sustaining momentum that can last several days without any new justification. In this case, the repricing phenomenon played out on Wednesday and Thursday. Friday brought some semblance of a bond market recovery, but it required a fairly sharp drop in oil prices. Now, at the start of this week, we have two-way volatility, but rates were definitely higher at the outset with the average top-tier thirty-year fixed hitting seven point five percent officially. The data this week will help determine whether last week’s scramble was a false alarm or an early warning that the bond market feels even more behind the curve than it already looks. Oil and war headlines still matter, as we’ve seen this morning already, with plenty of volatility in both directions. But the most pressing question is whether the econ data makes the case that the Fed’s latest rate forecast is unfortunately already out of date. That’s gonna 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.