Last week’s newsletter warned that it was time to start thinking about incredibly high volatility potential due to events in the first few days of November. But as far as interest rates are concerned, the volatility is already here.

Rates jumped sharply higher to start the new week in a move that still has market watchers scratching their heads.  Some analysts pointed to election odds as a catalyst while others thought it had to do with trader positioning in advance of the big ticket events in the coming weeks.  Either way, Monday saw mortgage rates jump more than an eighth of a percent–something they almost never do without clearly defined provocation.

After hitting the highest levels in months on Wednesday, there’s been a microscopic recovery in the 2nd half of the week.  Hopefully, this means rates are content to wait here for the next major source of inspiration.  

Why “hopefully?” Because there’s never any way to ensure the future will behave as the present suggests when it comes to financial markets. So what can we know? There are a few things.

We know that rates moved a lot higher over the past 4 weeks than the average media coverage suggests. Mainstream weekly surveys only show a spike of about 0.40%. The actual spike in daily average rates was over 0.70%.

We also know that next week’s jobs report (on Friday) is a huge source of potential volatility, for better or worse. Then, in the following week, the election could have an even bigger impact.  Top it all off with the Fed’s next rate announcement a few days later and the recipe for volatility is clear.  As always, remember that volatility goes both ways depending on the outcome of these big ticket events.

Highlights from this week’s economic and housing data:

This week’s most noticeable bond market reaction came in response the weekly jobless claims data.  Initially, it caused yields to rise because claims were lower than expected.  But traders also considered that “continuing claims” (those who continued to file for U/E beyond the initial week) rose to the highest level in years.

Existing Home Sales came in lower than expected and have generally been bouncing along the lowest levels since the Great Financial Crisis more than a decade ago.

Weekly mortgage application data has been in the news recently due to surge in September as rates dropped.  The refi index quickly shifted back toward those lower levels as rates have spiked in October.

As dramatic as the chart above may seem, everything is happening on a micro scale for refinance applications these days compared to the past refi waves.

This newsletter series spent 3 straight weeks trying to remind readers that mortgage rates could go higher after the Fed rate cut, and then several more weeks warning about the high stakes jobs report.  We had no way of knowing how the future would play out then, and that continues to be the case, but it’s time to get the next big warning on the table.

The past 5 months have seen some decent examples of volatility in financial markets, including mortgage rates. But the past week and a half has done a lousy job of preparing us for what could be a staggeringly volatile November.  

Despite some headlines suggesting sharply higher mortgage rates this week (due to Freddie Mac’s delayed weekly index), things have actually been mostly sideways since last Monday.  That was the next business day after the big jobs report earlier in the month.  Those two days accounted for 0.36% of upward movement in mortgage rates and we’ve stayed inside a 0.06% range ever since, according to MND’s daily rate index.

If you were tuned into interest rate and market movements in 2020-2022, you’ve already seen some real volatility.  While potential isn’t always realized, it’s important to understand that the first 6 days of November could bring big changes to the market.

This isn’t too hard to believe given all that can change after a presidential election, but the same 6 day window will also play host to another jobs report that’s just as important as the last one.  That data comes out the day after the election. 

The following Wednesday brings the next Fed rate announcement, which has at least some chance to result in “no rate cut” after a double-sized cut at the last meeting.  This is actually the least important ingredient in November’s volatility cocktail, but largely because the market will try to adjust for the Fed ahead of time based on how the jobs report comes out.

Using 10yr Treasury yields as a benchmark for interest rate movement, let’s refresh our memories as to the potential volatility associated with elections and the major policy changes that can follow (like the tax bill in late 2017).  

In this context, the election wasn’t the biggest source of volatility, but in outright terms, it saw rates increase by over 1% with a majority of that occurring in the first few weeks.  We’ll dig into this topic a bit more next week, but for now, just be ready for a big move in either direction.

As for this week, it was forgettable enough that we don’t need to spend any more time on it.  Nonetheless, we had some charts ready to go and everyone likes charts.  So here they are… submitted without (much) comment:

The chart above covers the 3 main components of the Census Bureau’s new residential construction report.  The chart below is the same thing on a longer timeline.  The only interesting thing to see here is the different takeaways about the construction side of the housing industry depending on permits/starts versus actual completions. 

The next two charts focus on Thursday morning’s econ data (the only day of the week with important data).  Jobless Claims remained elevated, which would have helped bonds if they weren’t elevated for temporary reasons.  Moreover, traders expected claims to come in even higher. 

The Philly Fed Index was much higher than expected, adding additional upward pressure for rates, albeit on a small scale in the bigger picture. 

It’s been frustrating and potentially confusing to see mortgage rates move consistently higher after the Fed’s September 18th rate cut, but the Fed has nothing to do with the big rate spike of the past few weeks. The Fed’s rate cut wasn’t even the reason that rates went higher in the last part of September, but it was a big part of the reason that interest rates moved so much lower in the preceding months, thus leaving themselves in a position to pause for reflection after the cut actually happened. 

That pause made for a gentle drift to modestly higher rates up until late last week.  Since then, it has been last Friday’s jobs report that created the unpleasant momentum that continues causing problems for fans of low rates.  All of the above is highlighted in the chart below:

Neither the gentle drift nor the big spike are surprises.  We exhaustively warned about the potential for higher rates after the Fed rate cut.  From there, the jobs report always had a lot of potential to send rates higher or lower in a hurry.  It just so happened we go the “higher” version.  Everything beyond those details has been fairly uneventful since then.  The big issue is that it will take big data to push rates back toward their recent lows, and that data would need to show a downbeat labor market.

The crop of economic data from the present week wasn’t up to the task of causing much movement, but it also wasn’t anywhere nearly as surprising as last week’s jobs report.  While the Consumer Price Index (CPI) has been even more important than the big jobs report on many occasions over the past few years, it is more of a strong supporting actor now.  Markets and the Fed are watching to make sure it doesn’t move back up, but there’s not much extra benefit to interest rates if it simply holds steady.

This week’s CPI came in just a bit higher than expected with the monthly “core” reading at 0.3 instead of the 0.2 forecast.  If Core CPI can’t manage to print more 0.2 and 0.1 readings, it will be tough for the Fed to cut rates too aggressively.  

Looking at the same data in year over year terms, we can see that it would be impossible to get to the 2% target unless we get monthly numbers  that are a bit lower (if this week’s 0.3% core inflation were repeated, it would eventually make for a 3.6% annual number, which is even higher than the current 3.3% annual level).

To be fair, this week’s CPI might have had a bigger negative impact on rates if not for the higher reading in Initial Jobless Claims.  Not to be confused with the big jobs report, Initial Claims are reported weekly in addition to continuing jobless claims.  A spike in jobless claims can help confirm labor market weakness at times when the economy is turning a corner toward recession.  This week’s number was the highest since last summer and much higher than forecast.

The chart above might raise some concerns about the labor market, but there are some mitigating factors.  The first is the chart itself, and the seasonal pattern that has played out in a somewhat similar fashion.  Notably, we aren’t supposed to be able to see seasonal patterns in this data because it’s seasonally adjusted, but if the normal labor market patterns are shifting, it can take time for adjustment models to adjust.  One workaround is to compare non-adjusted numbers to the past few similar years.  Doing so results in the following chart:

This chart suggests more labor market concern (due to the sharp spike in the red line compared to the others).  If it weren’t for hurricanes and other temporary distortions, it probably would have caused a bigger market reaction, but it’s being taken with a grain of salt for now.  If the red line continues operating well above the others over the course of several weeks, it will be a much bigger deal (and a legitimate benefit for mortgage rates).

The week ahead is shorter than normal for the rate market with Monday being closed for Indigenous Peoples’ Day.  Economic data remains sparse which means we could be waiting several more weeks for movement that’s even remotely as big as last week’s.

There was a lot riding on Friday’s big jobs report with a weak result likely to reinvigorate a move to long-term lows and a strong result likely to push rates higher. It ended up being VERY strong, thus pushing rates higher VERY quickly.

The following chart shows the day over day change in the 30yr fixed rate index from Mortgage News Daily:

The worst day in April was just a bit more abrupt, but it’s fairly uncommon to see a jump of more than 0.2%.  In outright terms, things look a bit better considering the ground covered since April. 

The most important headline in the jobs report is nonfarm payrolls (NFP), which is a count of new jobs created in the most recent month (September, in this case).  Not only did September’s 254k payrolls crush forecasts calling for 140k, but the past 2 months were revised higher as well.  This is important because recent payroll data factored into the Fed’s decision to cut rates by 0.50% two weeks ago.  Whereas the trend looked to be trailing off at weaker and weaker levels, it now looks a bit more resilient (mainly because the low point from 2 months ago is now higher than the low point from earlier in the year). 

If the Fed had seen that “higher low” in NFP and if they’d known about today’s 254k payroll count two weeks ago, would they have been as willing to cut rates by 0.50%?  The market doesn’t think so, and it quickly moved to adjust its expectations for where the Fed Funds Rate will end up this year.

Given all the upward momentum in rates seen over the past few weeks, as well as today’s exclamation point, some market watchers are hoping that next week’s inflation data can help put a ceiling over the current range.  While we wouldn’t rule out an impact from Thursday’s Consumer Price Index, it’s important to remember two things.

First, the market has largely moved on from obsessing over inflation in favor of obsessing over the labor market. We’ve seen smaller and smaller reactions to inflation-related data and it’s basically being monitored only for signs of a bounce.  

Second, inflation data can still hurt rates if it manages to show signs of a bounce.  In that sense, it’s an asymmetric risk where higher inflation would hurt rates more than lower inflation would help.  

In addition to the data, next week brings a deluge of speeches from Fed officials to help the market make sense of how the jobs report may or may not change the calculus.  If the past is any precedent, the Fed tends to remind markets not to get too wrapped up in a single economic report, but the counterpoint is that this particular single report brought fairly big revisions to the last few reports as well.

Longer term, the path of rates will depend on the economy.  Job data may be the most important, but the sum of other reports can create momentum in either direction.  As we’ve advised in the weeks leading up to and away from the Fed’s rate cut, there are several past examples of mortgage rates moving higher for a time after a Fed rate cut!  There’s no way to know if this will continue to be one of those examples–only that is has been for the past few weeks. 

‘Tis the season for things to be something other than what they appear to be, apparently. Lenders are talking about new loan limits, but they haven’t officially changed. News stories are saying rates went lower this week, but they’re higher. And there’s even talk of a big refi boom, but as you may have guessed, that’s also not exactly right.

Rates.

Rates continued to move slightly higher (yes, higher), while remaining close enough to long-term lows.  This chart of 10yr Treasury yields (a proxy for longer-term rates like mortgages) does a good job of capturing all of the positive momentum seen in recent months as well as the mild correction that began after last week’s Fed rate cut.

Things look even milder if we focus on mortgage rates.  In fact, one measure of mortgage rates (Freddie Mac’s weekly survey) is so mild that it actually went LOWER this week. 

Sadly, Freddie’s numbers don’t align with reality this week.  We are normally able to use the objective daily numbers from MND to reconcile such discrepancies, but it’s not possible in this case.  If you want a deeper dive on this phenomenon, here you go: Mortgage Rates are 100% NOT Lower This Week.

Loan Limits and Home Prices

Other misdirection plays are much easier to explain.  For instance, you may see some lenders advertising new conforming loan limits that are near, or over $800k.  Official conforming loan limits are announced at the very end of November.  So who’s lying?

No one…  In recent years, a handful of lenders have adopted their own loan limits a few months before the official announcement.  They cannot know with 100% certainty what the new limits will be, but calculation is the same every year and all but 2 months of the data are already available.

The data in question is the FHFA’s house price index.  Technically, it’s the “seasonally adjusted, expanded, quarterly” data set, but that data tends to change at about the same pace as the FHFA price index reported in the news each month.  This week brought the latest numbers, showing continued cooling in price appreciation. 

It seems like a safe enough bet that the blue line will still be well above zero 2 months from now.  To understand how close some of these lenders might be with their guesses, we can combine what we already know about the expanded quarterly data with the trends that have emerged in month to month price data.  Here’s the month to month chart:

In other words, price appreciation has averaged less than 1/2 of 1% over the past 3 months.  Moreover, two of the 3 highest months will fall out of the annual calculation before the loan limits are determined.  If the same pace continues, and if we apply it to the quarterly data that’s already available, the new conforming loan limit would be $800,950.  Several lenders are already higher than that, but expect them to pull back to the official number when it’s released in 2 months. 

Refi Boom

Is there or will there be a refi boom? The answer depends on your frame of reference.  We can assure you that this chart of the Mortgage Bankers Associations refinance index is accurate:

We can also assure you this chart is accurate:

In other words, there’s been a massive surge up from utterly depressed levels of refi activity such that we’re now in line with what had previously been considered the doldrums.  Things can certainly pick up from here although certainly not to historic highs any time this decade.  Those highs were marked by opportunities for every eligible mortgage holder to save money by refinancing.  Now that a large proportion of homeowners has rates in the 2s and 3s, they won’t have a refi incentive for the foreseeable future apart from debt consolidation or other non-mortgage-related motivations. 

On a final note, this week’s economic data was mostly forgettable.  Inflation continued to support the Fed’s increased focus on the labor market.  Core PCE prices–The Fed’s favorite inflation metric–have been very well behaved indeed, coming in below target yet again.

As for the increased focus on the labor market, next Friday brings the all-important Employment Situation (aka “the jobs report”).  It has more power than any other piece of monthly economic data to give rates a push, for better or worse.