This is Matt Graham with the MBS Live Market Update. If there’s one thing to know about last week’s rate movement, it’s that it left us almost exactly where we were at the end of the previous week. But how we got there felt quite a bit more dramatic at times. The week began on a hopeful note following over-the-weekend news of a pause in fighting in Iran. Oil prices moved logically lower in response, and rates followed, which has been the typical pattern during the course of the Iran war. Those good vibes lasted all the way through the first half of the week, and it wasn’t until Wednesday afternoon’s Fed announcement that we saw a meaningful reversal. To make matters worse, it wasn’t really a logical reversal at first glance. Futures markets, which traders use to bet on the level of the Fed funds rate at various points in the future, suggested a one in three, roughly, chance that the Fed would hike rates last week. As you probably heard, they did not hike, and that might seem like good news for rates. Markets actually reacted that way initially as well. But problems arose shortly into Fed Chair Warsh’s press conference Now, different Fed watchers have slightly different ideas as to what mattered most, but most agree that the key concern involved mentioning alternative measurements of inflation data beyond the traditional PCE or personal consumption expenditures data set. Some took this as a suggestion that he may favor data points that paint a better inflation picture in order to keep rates lower than they otherwise might be. But the counterpoint is that he could simply be referencing a goal to expand the data set that the Fed considers without abandoning a commitment to the two percent PCE inflation target itself. In fact, he did mention PCE is our number, so it was a bit contradictory in that sense. This is arguably relevant at times when PCE is trending in a certain direction and more granular data could help suggest that trend continues or that it’s reevaluated in some way. There were certainly many times in the Powell regime where Powell mentioned that he was looking at other inflation data to, uh, get a sense of what PCE may do in the future. But beyond that, some felt that the market gave the committee the green light to hike rates at that meeting and demonstrate a firm commitment to the inflation target at a time when inflation has been struggling to get back down to two percent and is also under a threat from the Iran war. And by not hiking rates, some bias toward lower rates was revealed. At this point in Warsh’s tenure, it’s way too early to make such claims, but that’s not to say they didn’t inform the way that some traders reacted. Lastly, on a purely qualitative note, some traders reported feeling that Warsh was talking tough on inflation without doing enough to reassure the market that he knew what conditions would warrant a rate hike. That’s part of the pitfall of, uh, commitment to abandoning forward guidance. The trader’s conclusion would be this, if Warsh won’t comment on the Fed’s current reaction function, which again is a separate matter from forward guidance, then markets will take matters into their own hands by selling bonds in the longer end of the yield curve, for example, the 10-year and 30-year treasuries. To a lesser extent, that impacts mortgage rates, but mortgage rates are short enough in duration that they did not get hit as hard as 10s and 30s, but nonetheless, uh, definitely moved up on Thursday and Friday. I’m not offering any judgment on the views that I just discussed. The goal is just to relate the market chatter that followed the press conference. Again, it’s too early to pass any judgment On what Warsh may be thinking beyond what he is explicitly saying. Objectively, all we know is that the long end of the yield curve did indeed swoon during the press conference, despite initially reacting fairly well to the two PM Fed announcement itself. And for whatever else it’s worth, the swoon ended exactly when the press conference ended. The week’s only other key event was not so much an isolated event as the general trading dynamic that played out on Friday. That involved additional Treasury selling, which of course pushes rates higher, and that was in response to currency intervention in the Japanese yen. When Japan seeks to bolster the yen’s value, one strategy can involve selling sovereign debt of other countries. Excess selling of sovereign debt of other countries, such as US Treasuries, pushes rates higher, all else equal. Esoteric currency considerations aside, Friday also saw oil prices move up moderately in addition to firmer inflation data in the form of the employment cost index. Last but not least, it was also month-end, which can create additional volatility. All told, mortgage rates moved up to the second-highest level in more than a year, but again, it was only modestly higher than last Friday. In the current week, oil price volatility remains relevant. A sharp drop over the weekend helped bonds start out on a good foot. We’ll also get the latest jobs report on Friday, which is always one of the two most closely watched economic reports as far as rates are concerned. 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.