This is Matt Graham with the MBS Live Market Update. Last week began with the bond market at its strongest levels in quite a while, at least October, 2024 for MBS and close enough to that same time for treasuries, although they briefly dipped to lower yields back in April. The economic data ahead of the much anticipated fed announcement mainly consisted of retail sales on Tuesday, and that provided an opportunity to see the level of underlying bullishness in the bond market. Reason being retail sales came out quite a bit stronger than expected, both at the headline level as well as the control group, which strips out autos, gas and building materials. But after a very small, very brief selling spree, bonds continued to rally to the best levels of the day and ultimately closed at lower yields on the day. Of course, it’s entirely possible that the bond market just wasn’t interested in moving it too far in either direction ahead of Wednesday’s much anticipated fed announcement. It’s not that the Fed was expected to be a key driver of rate momentum in the bigger picture. It is an important addition to the bigger picture. It adds context to the way that rates will respond to economic data. And in this particular case, it was one of the four meetings a year that contains a dot plot, a summary of each Fed member’s expectations for the Fed funds rate at various points in the future, and a particularly important one. Right now because it would speak to the recent shifts in the jobs reports and help the market understand whether the Fed was more likely to cut twice in 2025 or three times when the dots came out at 2:00 PM concurrently with the fed rate cut announcement. They were just slightly in favor of three rate cuts for 2025, and that validated the more bullish expectations that were trading in Fed funds, futures and bonds rallied immediately and swiftly under 4% in terms of 10 year yields, but heading into Powell’s press conference and it should be noted that when a press conference follows a dot plot that takes the market in one direction. That press conference tends to push back in the other direction. Fed Chair Powell poured cold water on the markets takeaway in not so many words. He characterized the rate cut as a quote unquote risk management cut, and he also said the dots were not a plan and that policy was not on a preset course. Surprise, surprise. It is all about economic data and the data will guide the rate, cuts or lack thereof into the end of the year. As for which data is important, there are always two main options for the Fed. That is employment and inflation and one of the other things Powell said in the press conference is that the focus had been on inflation for quite some time. The Fed is shifting toward guarding the labor market from additional weakness, which is just now creeping up as per the last two jobs, reports, and some other data. Even this week’s PCE is of limited importance, and that’s interesting because PCE is the Fed’s favorite way to measure progress towards its 2% inflation goal, but. The downside of PCE is that it comes out two weeks later than CPI and PPI. The other two big picture inflation reports, and much of the movement in PCE can be predicted by other data that comes out earlier in the month. As such, we wouldn’t expect a big reaction to PCE this week, and that is really the only report that you would look at on an economic calendar and say that’s an important report for the bond market. Instead, this week is a placeholder week between now and next week’s jobs report, which is critically important to setting the tone for the rest of the year’s rate momentum. The only thing that presents a bit of a wild card this week is an absolute deluge of fed speakers will hear from. Almost all of them and these speeches tend to be fairly interesting on the weeks after a Fed announcement, especially when the Fed Shares press conference has rattled the market. Those fed speeches in on those occasions often push back in the other direction. Some of them amplify it. All told they help build context and create small scale volatility in the short term as we wait for bigger picture momentum and volatility from data like next week’s jobs report. 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 MBSLive!
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.