Fairly Uneventful Follow-Up to Fed Day

Considering everything that transpired yesterday, today’s follow-up was about as calm as we could have hoped for.  Bonds lost ground, but the losses were focused on the long end of the curve.  That limited the damage for MBS, which have been hanging out with the middle of the curve these days.  AM econ data was a mixed bag despite appearing to be unfriendly at first glance. If it had any ill effect, it was minimal.  In the bigger picture, Thursday simply represented a leveling-off after Wednesday’s rout.  Friday brings monthly PCE inflation, which is certainly capable of causing a big reaction, but it almost never lives up to that potential. 

Econ Data / Events

GDP 

3.1 vs 2.8 f’cast, 3.0 prev

Philly Fed Index

-16.4 vs 3.0 f’cast, -5.5 prev

Philly Fed Prices

31.2 vs 26.6 prev

Jobless Claims

220k vs 230k f’cast, 242k prev

Continued Claims

1874k vs 1890k f’cast

Market Movement Recap

09:14 AM Sideways to slightly weaker overnight and little-changed after AM data.  MBS down 1 tick (.03) and 10yr up 2.3bps at 4.537

02:08 PM Modest additional weakness into 1:30pm.  MBS down 3 ticks (.09) and 10yr up 3.7bps at 4.552

The takeaway from yesterday’s Fed announcement was twofold.  First, the Fed is much closer to being done cutting rates than it anticipated in September. This accounts for the sharp sell-off in bonds and stocks.  The second takeaway is simply a confirmation of our recent change of heart regarding inflation data.  Powell noticeably downplayed the need to obsess over the labor market, thus placing the main focus on inflation yet again. The shift in the Fed’s inflation outlook for 2025 confirmed the concern.
In short, the takeaway continues to be that rates can’t move meaningfully lower without a meaningful drop in inflation.  To sum things up, we have one takeaway pushing yields higher and another that prevents them from moving lower.
Today’s chart focuses on yesterday’s market movement in light of the ramped-up news coverage of the government funding bill.  If you’ve been wondering if that played a role in yesterday’s weakness, consider that the spending bill news broke before the Fed announcement (the first white line in the chart below).  There was no detectable surge in volume nor any movement in the bond market.  Is it possible that markets were fixated on the Fed and that fiscal considerations added to weakness throughout the day?  Technically, but that raises a separate issue: a government shutdown has historically been good for rates.

When I see a headline with “housing” and “crash” in it, I think it is merely clickbait, and the author is trying to attract readers. For example: The Office of the Comptroller of the Currency (OCC) reported on the performance of first-lien mortgages in the federal banking system during the third quarter of 2024. The OCC Mortgage Metrics Report, Third Quarter 2024, showed that 97.4 percent of mortgages included in the report were current and performing at the end of the quarter, a slight increase from 97.3 percent one year earlier. Borrowers have the ability to repay, there’s equity, and the majority of existing rates are low. If want to fret, target renters who want to own. It seems like the best time to buy a home has always been in the past, and now affordability is not good. ATTOM released its fourth-quarter 2024 U.S. Home Affordability Report showing that median-priced single-family homes and condos remain less affordable in the fourth quarter of 2024 compared to historical averages in nearly every county. The latest trend continues a three-year pattern of home ownership requiring historically large portions of wages as U.S. home prices keep reaching new heights: View Q4 2024 U.S. Home Affordability Heat Map. (Today’s podcast can be found here and this week’s podcasts are sponsored by Visio Lending. Visio, which has a top-notch broker program, is the nation’s premier lender for buy and hold investors with over 2.5 billion closed loans for single-family rental properties, including vacation rentals. Hear an interview with Visio Lending’s Jeff Ball on the DSCR underwriting space and how the mortgage industry can qualify more eligible borrowers.)

US new-home construction unexpectedly fell in November as a drop in multifamily projects mitigated a rebound in starts of single-family houses, solely in the storm-ravaged South.

Borrowers with new foreclosure filings also grew, but the number of loan modifications decreased, according to the Office of the Comptroller of the Currency.

Monetary policy officials greenlighted a 25 basis-point federal funds cut but mixed economic signals dimmed hopes for more affordable home financing costs.

Homeowners experiencing a death in the family, divorce or domestic violence complained of being strong-armed into costly refinances, facing long delays or simply not being helped.

Premium volume increased by 5.3% year-over-year, while operating income was up, but industry expenses also rose in the third quarter, the American Land Title Association said.

If anyone needed any further convincing that a Fed rate cut is no guarantee of lower mortgage rates, today is a great piece of evidence.  Perhaps “great” is the wrong word.  There was nothing great about the mortgage rate movement following today’s Fed rate cut. The average lender is at least 0.20% higher than earlier this morning.  Lenders are still in the process of adjusting their rate sheets, so the total damage could vary slightly by the time we’re able to run the full numbers.  Either way, the top tier conventional 30yr fixed rate will easily be back over 7% for the average lender. What gives? First off, the mortgage rate spike has nothing to do with the Fed’s rate cut.  That cut was only a small part of the information released by the Fed today.  It was also the most predictable part.  When something is predictable in financial markets, it can be traded, and that trading means that longer term rates (like mortgages) can move into position well in advance of Fed cuts/hikes. Moreover, mortgage rates care more about the Fed’s rate cut/hike outlook than they do about one individual cut/hike.  That’s where things started going wrong today.  The Fed communicates its outlook 4 times a year via the summary of economic projections and the infamous “dot plot” (a chart with each Fed member’s view on the appropriate Fed Funds Rate at various points in the future).  Today’s dot plot showed the median Fed member sees much higher rates by the end of next year compared to the last dot plot 3 months ago.  The following chart shows the new dots in blue and old dots in red. The year to focus on is 2025.  Note the migration upward from the low 3 to high 3 percent range.

Dots and Powell Were Much Less Friendly Than Markets Expected

We knew the bond market was expecting a hawkish shift in the dot plot (the chart that shows each Fed member’s expectation for the Fed Funds Rate in the coming months/years), and while there is now easy way to know exactly how big the expected shift was, it was clearly not as big as the shift we actually saw!  The median dot moved from the low 3% range for the end of 2025 to just under 4%.  On top of that, Powell’s press conference offered no reprieve as he confirmed the Fed was entering a new policy-making phase marked by the possibility of pausing rate cuts and the reality that current rates are closer to neutral than previously believed. Bonds tanked immediately upon the release of the dots and then tanked some more as Powell began answering questions 30 minutes later.

Econ Data / Events

Housing Starts

1.289m vs 1.34m f’cast, 1.312m prev

Building Permits

1.505m vs 1.43m f’cast, 1.419m prev

Market Movement Recap

10:04 AM weaker overnight with Europe, but recovering in early domestic trading.  MBS up 2 ticks (.06) and 10yr down 1bp at 4.391

12:47 PM 10yr down 1.5bps at 4.386.  MBS up 1 tick (.03).

02:13 PM Sharply weaker after Fed announcement (and dot plot).  MBS down a quarter point and 10yr up 4.7bps at 4.447

02:57 PM More losses during Powell Press Conference.  MBS down almost half a point and 10yr up 8.5bps at 4.486

03:38 PM How low can we go?  MBS down more than 5/8ths.  10yr up 10.3bps at 4.505