Good Friday AM from your Hometown Lender,
The bond market is taking a breather after two great days of improvement.
The 10yr note is 20bps better than earlier in the week. The bias at the moment has shifted into our favor.
Matt Graham penned some decent insight…
Rate sheets today will be better, matching the best pricing we’ve seen in 2025. Reprice risk today is low, it is unlikely we see bonds turn south from here with no economic data and momentum on our side. There’s been a temporary but definite shift in the outlook that opens the door for floating, however there remains a lot of risk and locking is not a bad call. Remember that markets will be closed on Monday for Martin Luther King Jr. Day, and we could see bigger moves when bonds reopen on Tuesday. Yesterday mortgage bonds started the day with losses but took a huge jump into positive territory around 11am ET and held the gains through the day, putting many lenders in a position for afternoon reprices better.
What drove this action?
It was comments from Fed Governor Christopher Waller during a “Squawk on the Street” interview with CNBC that the Fed could continue cutting its policy rate in the first half of 2025 if inflation data supports it, even as soon as March. Waller’s actual words were, “As long as the data comes in good on inflation or continues on that path, then I can certainly see rate cuts happening sooner than maybe the markets are pricing in.” He continued to say, “That’s all going to be driven by the data. I mean, if we make a lot of progress, you could do more,” which he said could mean three or four cuts next year.
That was all traders needed to hear after Wednesday’s CPI inflation data had come in slightly better than expected, and sent bonds off to the races. More importantly, it cemented in a turnaround, that although isn’t likely to last for long, takes the immediate pressure off of locking for protection.
And the MBA shared that (and read the last paragraph):
The job market strengthened in December, with payrolls increasing by 256,000 for the month and capping a year of faster-than-expected job gain; the average monthly number of jobs added per month was 186,000. The unemployment rate decreased to 4.1%, and wage growth decreased slightly to 3.9%. The December employment report was a picture of a strong job market. While the FOMC had indicated that they could slow the pace of rate cuts as we enter 2025, these data make at least a pause in cuts much more likely, pushing mortgage rates higher in the near term.
However, as we highlighted in a previous Chart of the Week, the share of workers who were unemployed for longer spells has increased, implying that even though the job market is generally strong, it has been harder for those workers who have lost jobs to regain employment. In another BLS survey, the Job Openings and Labor Turnover Survey (JOLTS), we see that hiring and quits have been declining. Openings did pick up in November but had been trending lower since 2022.
In November, the number of hires was less than 5.3 million, its lowest level in 6 months and at levels last seen in 2016. Since reaching a recent peak of 6.9 million in 2022, the number of hires has drifted lower. The number of quits was just under 3.1 million, which, outside of the 2020 pandemic period, was the lowest since 2018. Quits are an important indicator of labor market health since, in a weaker job market, they tend to decline as workers are less willing to leave their current jobs as they see fewer or less favorable job options available. On the other hand, in a stronger job market, quits tend to increase as workers vacate their positions for better opportunities.
In closing, while the December employment report was one of relative strength, other data points indicate that some potential weakening in the job market is around the corner. Our forecast is for monthly job growth to slow gradually in 2025 and for the unemployment rate to move higher over the course of the year from its current level of 4.1%, potentially reaching 4.5% by 2026.
Stay safe, enjoy the weekend and first, make today great!