This is Matt Graham with the MBS Live Market Update. Last week was fairly interesting for the bond market with three key market movers having an impact on fed rate cut expectations, as well as longer term yields. That said, longer term yields remained in a fairly narrow range. In the bigger picture, it’s the same narrow range that’s been intact throughout the month of November, and only this morning are we beginning to challenge the lower boundary of that range. But back to last week, starting with the first key event, we had Wednesdays Fed Minutes. This is in more detailed account of the Fed meeting that took place three weeks earlier, and we felt heading into this one that many of the recent Fed speeches had been preparing the market for a more hawkish takeaway. In other words, rate cut expectations had been fairly robust for December, but these speeches began to push back on that placing more emphasis on the inflation side of the Fed’s mandate and downplaying recent concerns over the labor market. The minutes validated that the Fed uses different descriptors or numerical values or a number of Fed members at the meeting that are saying certain things. And the two key descriptors in this instance of the minutes were many and several. Several said that a rate cut could well be appropriate in December, but many said that it would likely not be appropriate. This was the biggest revelation in the minutes, and even though that was from late October, the bond market reacted with fed funds futures, putting the rate cut odds at their lowest levels since before the August jobs report back in early September. The following morning brought the long awaited release of the delayed jobs report that was supposed to come out in early October. While that is a bit stale, we expected it to get a good response in terms of volume, and indeed that was the case. It was the highest volume event since that fed meeting in late October, and the movement itself was not quite as robust, largely because there were mixed signals in the report. There are two key sides of the jobs report. One is the establishment survey, which surveys businesses on the number of payrolls they’ve added. And the other is the household survey, which asks regular old people whether or not they consider themselves part of the labor force and whether or not they have a job. The latter gives us the unemployment rate. The former gives us NFP or non-farm payrolls. NFP is typically the more important headline, but that’s begun to change recently over the past six months or so. But nonetheless, NFP is worth noting because it came out much stronger than expected at one 19 versus a median forecast of 50k. Pretty big beat in and of itself and would normally be enough to push bond yields higher, but the previous month was revised down to negative 4,000 versus an initially reported 22,000. But even that shouldn’t have been enough for the bond market to come away unscathed for that. We relied on the unemployment rate taking up to the highest levels of this cycle at 4.5% versus a median forecast at 4.4. And the Fed has also placed more emphasis on the unemployment rate as far as guiding rate cut expectations. So if there was one key reason that bonds were able to gain a small amount of ground after that jobs report, that would be it. They may have gained more ground had it not been for the fact that the labor force participation rate also increased, and that mitigates the uptick in unemployment to some extent, because when more people consider themselves part of the workforce, it requires more jobs in order to keep a level unemployment rate. This doesn’t mean that 4.5 isn’t 4.5, it just is a slightly softer implication for labor market weakness Then. We would have had if labor force participation had held steady. The biggest market mover of the week for bonds was actually a comment from New York Fed President Williams on Friday who said that he still sees room for a near term rate cut. This ran counter to many of the speeches in the previous week where multiple fed speakers said that they’re not feeling so great about a December rate cut. Williams carries more weight. He is a member of the governing board, and next to Powell, the most important voice at the Fed. So Fed funds futures moved fairly sharply on that news heading back to their best levels since late October. Now at the start of the new week, we don’t have any data on Monday, but many more reports are coming out on Tuesday and Wednesday. Many of them are also delayed releases of reports that were canceled due to the shutdown. They might have less impact as a result. And as always, we also have to be on guard for elevated random volatility on Thanksgiving week due to lower participation levels. At the end of the day, we’re still really waiting on the mid-December economic data for our first clean, more robust, more accurate read on what’s going on with the economy. And it will be hard for the bond market to make any big challenges to prevailing range boundaries until that data comes in. 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.