Mortgage application activity was essentially flat last week, almost impressively so. After much recent volatility, the index is finding a brief moment of stability, and borrowers seem content continue to weigh affordability challenges and wait for clearer movement in rates. The Mortgage Bankers Association (MBA) reported that applications decreased 0.3% (seasonally adjusted) for the week ending February 6, while rising 2% on an unadjusted basis. Purchase demand softened modestly. The seasonally adjusted Purchase Index slipped 2% from the prior week, while unadjusted purchase applications increased 4% and were 4% higher than the same week one year ago. Refinance activity posted a small gain. The Refinance Index rose 1% from the previous week and remained 101% higher than a year earlier. Joel Kan, MBA’s Vice President and Deputy Chief Economist, described the week as a mixed bag across loan types. While the 30-year fixed rate held steady at 6.21%, conventional applications declined for both purchases and refinances as some borrowers wait for a more meaningful drop in rates or migrate toward other loan types and products. And they appear to be doing just that, as FHA and ARM products saw an increase in apps last week. Kan noted that FHA purchase and refinance applications increased, supported in part by FHA rates that remained roughly 20 basis points below the conforming 30-year fixed rate. He added that borrowers are increasingly turning to FHA loans as affordability pressures persist. At the same time, the ARM share climbed to a seven-week high, with ARM rates running nearly a full percentage point below comparable fixed rates.

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Nearly an hour after this morning’s surprisingly strong jobs report, 10yr yields are only 4.4bps higher at 4.19%. On a normal day, 4.4bps might be a fairly big sell-off, but it’s a huge victory on a day where payrolls came in at 130k vs 70k forecast, and where the unemployment rate fell to 4.3 vs 4.4 expectations. Moreover, labor force participation moved 0.1 higher, which means the unemployment downtick is an even stronger sign (all else equal, unemployment will rise 0.1 if participation rises 0.1). The only knock on the data is that the healthcare sector did all the heavy lifting, and it was well outside the recent range of gains. 

In other news, there will be plenty of buzz today about the “massive” annual benchmark revisions to non-farm payrolls that came out with today’s data.  Be aware that this is not a surprise to the market. In fact, the market expected an even bigger downward revision. Also be aware that this is just info for economists and statisticians. It has no impact on the unemployment rate. It doesn’t mean the labor market was weaker than initially reported.  It exists solely for the purpose of updating models to more accurately measure changes in payroll counts in the future. Month to month changes in payrolls matter to the bond market.  Huge annual benchmark revisions do not. Unfortunately, they’ve gained a status as a talking point.

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Best Levels in Weeks Ahead of High Stakes Jobs Report

Rather than circle the wagons and consolidate the recent rally, bonds kicked the buying into higher gear on Tuesday thanks to a surprisingly weak Retail Sales report for December. This can be added to the list of recent data that has urged the bond market to get in position for a similarly weak jobs report tomorrow. Nearly 15bps of improvement in less than a week means that jobs would have to especially downbeat for this pace to continue. If the report surprises to the upside, bonds are at risk of a reasonably brisk correction, but as always, the scope of potential volatility depends on the deviation from the median forecast.

Econ Data / Events

Employment costsQ4

0.7% vs 0.8% f’cast, 0.8% prev

Import prices mm (Dec)

0.1% vs 0.1% f’cast, — prev

Retail Sales (Dec)

0% vs 0.4% f’cast, 0.6% prev

Retail Sales Control Group MoM (Dec)

-0.1% vs 0.4% f’cast, 0.4% prev

Market Movement Recap

09:03 AM Gradually stronger overnight with additional gains after 8:30am data. 10yr down 5bps at 4.157 and MBS up 2 ticks (.06).

11:15 AM Additional gains. MBS up an eighth of a point and 10yr down 7.3bps at 4.135

01:10 PM off the best levels, but still stronger. MBS up 3 ticks (.09) and 10yre down 5.9bps at 4.149

02:55 PM Drifting sideways into the close with MBS up 2 ticks (.06) and 10yr yields down 6.1bps at 4.147

Mortgage rates fell on Tuesday following a downbeat Retail Sales report. At 0.05%, it was the largest single-day drop since the uncommonly big 0.15% drop on January 9th. This also takes the average 30yr fixed rate to 6.11%, easily below its recently narrow range of 6.15-6.20. The bonds that drive mortgage rates are always tuned in to various economic reports for movement cues. Weaker data = lower rates, all else equal. Retail Sales is hit and miss when it comes to causing rate volatility. The undisputed champion among economic reports is tomorrow’s jobs report at 8:30am ET. Several recent rate rallies have been slightly larger than they otherwise might have been because the market may be positioning for a downbeat jobs number. If it is weaker than expected, there’s certainly room for the rate rally to continue, but if the report shows resilience, rates would likely bounce back higher.