Matt Graham, Founder and CEO, MBS Live
[Matt] This is Matt Graham with the MBS Live Market Update. Last week was an exciting one for the bond market and the mortgage market with several big-ticket economic reports and a generally high level of volume and volatility. This began right out of the gate on Tuesday. It was a holiday shortened week due to the Labor Day weekend and some of the weakness that transpired at the end of the previous week was reversed as a simple matter of a new month trade flows coming into the market. It’s not uncommon to see a little bit of a serendipitous volatility for better or worse heading into the last few trading days and especially the last few trading hours of any given month, and that can be exacerbated when it is a Friday before a three-day holiday weekend, as was the case two weeks ago. So, some of the buying on Tuesday morning was related to the new month trading, but economic data didn’t hurt the bond market either. The first big ticket economic report was ISM manufacturing at 10 AM on Tuesday. It was weaker than expected and the prices component wasn’t too much higher than expected, but the bond market rallied mainly due to those trade flow considerations. Economic data had a bigger impact on Wednesday with job openings and labor turnover survey, aka JOLTS, coming in much weaker than expected, 7.0 67 million versus 8.1 million forecast. That’s a number that continues to trend lower, suggesting something between labor market normalization and perhaps labor market cooling to some people those are the same thing, and that’s okay too. Thursday, we had ADP jobs. has a storied past competing with non-farm payrolls or not really competing with but being compared against non-farm payrolls because that is the number that ADP is trying to capture. Or rather, it is the final revision of non-farm payrolls that ADP is trying to capture. But in any event, it was much weaker than forecast 99K versus 145 previous month, revised lower and that kicked things off in a positive direction for the bond market on Thursday, but that rally didn’t really stick around, we had data come in at 10AM in the form of ISM services or ISM non manufacturing that pushed back against the ADP led rally and that ushered us into Friday morning’s big jobs report in a fairly unchanged territory at first, actually, we had a little bit of a stronger lead off heading into the jobs report, but that didn’t really matter because we were soon to trade very swiftly on both sides of the unchanged line for a variety of reasons for many market participants. This jobs report was looked at as the deciding vote as to whether the Fed would cut rates by 25 bips or 50 bips in next week’s fed announcement and it turned out to not readily fill that role. It was definitely weaker than expected and that garnered a bond market rally out of the gate with nonfarm payrolls coming in at 142K versus 1 60. There were also fairly substantial negative revisions to previous months, and as a reminder, downward revisions are normal when the labor market is contracting and or cooling. As it is now, I guess we wouldn’t say contracting as much as we would say cooling. And the distinction this time is that the negative revisions are a little bit bigger than during a more normal cooling cycle. You’d have to go back to 2020, and then before that, all the way to 2008 to see a larger average downward revision. That suggests something new and different might be happening, and it’s one of the reasons bonds were able to rally heading into midday. The other reason was positive interpretation of some Fed comments. We had Williams and Waller both hitting the tape, but there was analytical clarification on Waller’s comments that seem to suggest rather than saying 50 bips was the rate cut to expect that 50 bips could happen in future rate cuts if economic data justifies it. So, what we then saw was the Fed funds futures market abruptly choose a side of that debate and not necessarily skyrocket toward higher implied yields, but a sharp move, the sharpest move in many weeks to the highest implied yields in many weeks and it was very obvious that the market was choosing the 25 BIP rate cut, as opposed to the 50 BIP cut after it had the totality of the week’s economic data and fed speakers in the rear view. It didn’t change too terribly much for the long end of the yield curve or for mortgage rates, which ended the week at their best levels in more than a year and a half. Starting the week in the same stance, waiting for treasury auction data and the CPI PPI combo, which are the last few things that might help the Fed finalize its decision hard to say exactly what they will say next week. But if CPI and PPI were very weak, it could bolster the case for a 50-bit rate cut again. Otherwise, the market seems to be leaning toward 25 bits, but either way, the Fed’s likely to balance out whichever rate cut they deliver. With verbiage either in the statement itself, the press conference that follows and potentially even tweaks to the SEP summary of economic projections that contains the dot plot outlining each Fed members projection for the Fed funds rate into the future. That’s going to do it for this week. Back to you.