Stocks and Mortgage Bonds are both higher so far this morning. The 10-year yield is moving lower, currently trading at 3.79%, beneath an important level at 3.80% for now.
Later this afternoon at 1:00pm ET there will be a 20-year Bond Auction, which could impact the markets, depending on the level of demand. With the outlook for yields to move lower, it would make sense to see strong demand, which could help Bonds further...although the 10 and 30-year auctions earlier in the month were weak - It would have been smart for investors to jump in as yields have come down since those auctions. We will see if investors are wiser at today's auction.
At 2:00pm ET the Fed Minutes from the July 31 Fed Meeting will be released. This will give us a closer look at what was discussed at the July 31 Fed meeting, where the Fed left rates unchanged. It was also before we got the big jump in the unemployment rate, but nonetheless, it still could be important and give us some more insights. These minutes will likely have a bit less importance than usual because we will be hearing from Powell with current thoughts on the market on Friday at Jackson Hole...And we will see what he says about the labor market.
BLS Benchmark Revisions to Jobs Data
The BLS released their benchmark revisions for job data from March 2023 to March 2024, showing that the BLS overstated job growth by 818,000 jobs! That means about 1 in 3 jobs that they reported were created, never happened.
If you average out how much the revision is on a monthly basis over the year, it would be a revision of -68k per month. On average, we saw 242,000 jobs created per month from March 2023 to March 2024, which now falls to 174,000. This would have materially changed the strength of the jobs reports that pressured the Bond market many times over that period of time.
It’s scary that this is also the data that the Fed goes off to make their monetary policy decisions. The Fed is likely going to feel some additional pressure from this report, as they are behind the curve more than they even thought. There are a few other data points that will go into their rate cut decision on September 18, including a PCE inflation report for July on 8/30, Jobs Report for August on 9/6, and CPI inflation report for August on 9/11. But today’s revisions could play a role and we believe underscores why the Fed needs to cut 50bp.
Interestingly, the last three Fed rate cut cycles all began with a 50bp cut…we will see if history repeats itself.
Philly Fed Services Index
Manufacturing has been in a recession for some time now, but we are starting to see a trend of weakening now in the service sector. The Philly Fed non-manufacturing index for August was reported at -25.1, which is even more negative than the -19.1 in July. This is the worst reading since December 2020 and is the seventh month in the past eight that is figure is negative.
Looking to future expectations, the six-month outlook fell 54 points in the last two months from 44.7 in June to -9 in August, which is a huge swing and change in outlook.
The inflation components were benign, and the employment components were very weak. Full-time jobs contracted for the second month in a row to -14.9, while Part-time jobs also decline to -0.5.
Mortgage Applications
Mortgage application data from the MBS (Mortgage Bankers Association) showed that refinance volume cooled off and fell 15% last week. This follows a 57% jump in the previous two weeks, showing that there is a lot of business available when rates fall, but it was short-lived. It’s important to have conversations with your past customers ahead of time to establish a “strike price” and get a commitment to move forward once rates hit the target.
Refinances are still up 90% year over year and made up 46% of total applications, down from 49% in the previous week.
Interest rates were relatively unchanged last week at 6.5% when it was all said and done, although there was volatility. Rates are now 3/4% lower than they were this time last year.
Refinances jumped 35% last week after rising 16% in the previous week, which means Refinance activity
Purchase applications fell 5% last week and are down 8% year over year.
Technical Analysis
Mortgage Bonds are continuing higher and have broken above important resistance at 100.79, at least for now. A close above this level would be key and would likely lead to follow through higher.
The 10-year has moved lower to 3.79%, just under the 3.80% floor that has been a tough level of support and has held the last few times it was tested. A close under this level and convincing break would be promising, as the next floor is down at 3.66%, which is an important Fibonacci floor and would be the lowest yield since June 2023.
There could be volatility in store later today with the 20-year Bond Auction and Fed Minutes, although the Fed minutes are from the Fed meeting three weeks ago and we will be hearing from Powell on Friday.
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