Who Lied About Jobs Numbers? Unpleasant day for the bond market with jobs crushing forecasts and being revised higher for the past 2 months.  We knew it would be high stakes and the magnitude of the reaction makes good sense relative to the data.  But how do we reconcile this against the weaker jobs numbers in the past 2 months?  And what about reports of a record number of government jobs?  As is often the case, there are nuances and today's MBS Live recap video offers a deep dive that will help clear up a few of them.  If you don't have time to watch, the takeaway is that Federal gov jobs were basically flat (adding 1k payrolls whereas state/local gov added 29k payrolls).  For context, the biggest categories in health care and food service each added more than 70k jobs.   Econ Data / Events Nonfarm Payrolls 254k vs 140k f'cast, 159k prev Unemployment Rate 4.1 vs 4.2 f'cast Wages 0.4 vs 0.3 f'cast last month revised up to 0.5 Market Movement Recap 08:33 AM Bonds destroyed after strong jobs report.  MBS down almost half a point.  10yr up 9.5bps at 3.943 11:32 AM Flat and right in line with initial sell-off levels.  MBS down half a point.  10yr up 11bps at 3.956 03:09 PM weaker drift continues. 10yr yields up 13.5bps at 3.982.  MBS down 5/8ths of a point. 

Today's much-anticipated jobs report ended up coming out much stronger than expected.  A stronger result was all but guaranteed to cause carnage (relative) in the mortgage market and that's definitely what we're seeing.  A caveat is that rates are still much lower than they were several months ago, but the average lender is now back in line with mid August levels.  Additionally, this is one of the largest single day jumps we've seen with the average 30yr fixed rate moving from 6.26 to  6.53.  A move of more than 0.25% in a single day is tremendously uncommon, but it can happen due to the underlying structure of the mortgage bond market.  For those who would like to nerd out on those details, here you go: Whether a mortgage lender is lending their own stockpiles of cash or temporary cash obtained from a credit line, the chunk of cash wired to escrow at closing carries a cost.  For a majority of mortgage lenders, the day to day changes in those costs are determined by the trading of mortgage-backed securities (MBS). MBS are similar to bonds like Treasuries in that investors pay a lump sum of cash and earn interest over time.  They're different in several key ways.  The most important difference is that the “borrower” of US Treasuries (i.e. the US Government) cannot return principal to the investor and end the deal.  It must continue to pay for as long as it agreed. Mortgage borrowers, on the other hand, can sell/refi/etc and end the mortgage that underlies the mortgage-backed security.  This introduces an element of uncertainty for investors that will be important in a moment.

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It is a very simple day for the bond market.  There was a ton of anticipation for today's jobs report after the past two iterations raised concerns about flagging labor market conditions.  Indeed, the Fed's decision to cut by 0.50 vs 0.25 last month had much to do with the fear/expectation that reports like today's would be in shorter supply going forward.  In other words, a 0.25% cut would have been more likely if they knew that today's NFP would come in at 254k vs 140k with unemployment ticking down to 4.1%.  The bond market is taking care of it though.  Futures have priced 2024 rate cuts back to levels seen before the last jobs report. Bonds are tanking, as you'd expect.  The only salvation here would be the notion that this is just one jobs report in a recent run that's been mostly weaker and that perhaps the next one won't be so damning for bonds. 

ISM Makes For Negative NFP Lead-Off If the bond market has to digest an ISM Services report that is much stronger than expected, it would be best not to have it come out less than 24 hours before the big jobs report.  Otherwise, you get a day like today where the data fueled a pre-NFP (nonfarm payrolls--the headline component of Friday's jobs report) lead off toward higher rates.   Econ Data / Events Jobless Claims 225k vs 220k f'cast, 219k prev S&P Services PMI 55.2 vs 55.4 f'cast, 55.7 prev ISM Services 54.9 vs 51.7 f'cast, 51.5 prev ISM Employment 48.1 vs 50.2 prev ISM Prices 59.4 vs 56.3 f'cast, 57.3 prev ISM Activity 59.9 vs 53.3 prev Market Movement Recap 08:34 AM Weaker overnight and no major reaction to Jobless Claims.  MBS down 3 ticks (.09) and 10yr up 2.6bps at 3.81 10:05 AM Weaker after ISM. 10yr yields are now up 5bps at 3.833 and MBS are down another 3 ticks (.09) for a total of 6 ticks (.19) on the day.  03:16 PM pre-NFP drift toward weaker levels.  MBS down 9 ticks (.28) and 10yr up 6.3bps at 3.846 05:13 PM bonds closed near weakest levels, and right in line with the previous update.

Depending on how tuned in you've been to changes in our daily rate tracking, the news may be getting old at this point.  Rates have done almost nothing but move higher ever since the Fed cut rates on September 18th. While this continues to be a challenge for some folks to comprehend, it was always a risk, which is why we spent several weeks warning about the possibility leading up to Fed Day.  Thankfully, the increases have been small in the bigger picture.  Today was just another day in that regard, although it was one of the bigger bumps in the road if we look at today's highest rates versus yesterday's lowest (Wednesday saw higher rates in the morning and lower rates in the afternoon.  Thursday was the opposite pattern).  Lenders increasingly increased rates throughout the day after an important economic report (ISM Services) showed much stronger than expected growth.  As important as ISM data is, it's nothing compared to Friday's forthcoming jobs report.  No other piece of scheduled economic data has as much power to cause volatility for rates. At this point the market has done a fairly good job of processing any remorse it might have had about getting too excited for Fed day and/or any anxiety that has been building about the econ data not being weak enough to justify a fast rate cut pace.  This leaves Friday's data in a good position to either help or hurt in a fairly big way.  The size of the reaction is generally proportional to size of the "beat" (job creation higher than expected) or "miss" (the opposite). There's no way to know which one we're going to get ahead of time.  Occasionally, the data leads the bond market to "thread the needle" with rates ending up not far from where they started.  

Tis the time of year when pumpkins have magically appeared in bins outside supermarkets and on porches. Which state grows the most? It’s hard to beat Illinois with its 18,000 acres of pumpkins. 2,100 miles away, in California (with roughly 900,000 acres of grapes), what happens when a family with a vineyard tries to do a tiny bit to help the housing/shelter market? In California, it isn’t pretty: Decent people, not criminals… They should have painted it camouflage. In addition to the terrible personal toll, wide swaths of housing are wiped out by fire (Maui) and now Helene, impacting supply and demand. Whether it is trends in residences, income, or credit analysis, things change. Do the Agency guidelines fit the current trends in income? Arguably not. (Capital markets staffs certainly can’t hedge GSE changes to gfees.) What about non-owner DSCR loans, are you concerned about that credit risk? You can’t hedge that either. Time will tell. For supply, new listings came in recently 8% ahead of a year ago, sending total active inventory 33% higher versus last year, while the median listing price was 1% lower, all encouraging signs for buyers. (Today’s podcast is found here and this week’s is sponsored by Candor. Candor’s authentic Expert System AI has powered more than 2 million flawless, hands off underwrites. Every credit risk decision Candor makes is backed by a Warranty, eliminating repurchase worries. Hear an interview with Nectar’s Derrick Barker on the long-term implications of builders not meeting market demand for homes.)

There are some labor market reports that cause some concern about a weaker job market.  And while Jobless Claims is often thought to be a leading indicator, it is not one of those reports.  Today's release is the latest example.  The 225k headline is a bit higher than the forecast of 220k, but still right in line with trends from the 3 most recent, "normal" years.   As such, the data offered no support for moderate weakness in the bond market.  As for the nature of that moderate weakness, it's still best viewed as a broad consolidation following the extended rally leading up to the Fed's rate cut.  There are several ways to look at it.  You could say the market got a bit ahead of itself or that Powell has been a bit more hawkish than the market expected, or that the data hasn't seen the incremental deterioration needed to sustain the pace of the longer-term rally. Either way, the consolidation has been orderly, and even with this morning bringing yields in line with their highest levels in a month, the whole thing still looks flat and sideways over the past 2 weeks.  By getting to this point today, the consolidation game is over because tomorrow's jobs report decides the next move.  All that's left for today is ISM Services--a report that certainly could cause some last minute excitement, for better or worse.

Wednesday's Market Movement Raises Stakes for Friday There are times when the bond market seems not to care too terribly much what the ADP Employment report is saying.  There are other times when ADP has a surprisingly big impact.  Relative to the size of today's beat, we arguably saw one of the surprisingly big reactions today.  It's not that the move was huge, but rather, that a beat of 143k vs 120k f'cast isn't really worth trading one way or the other normally.  It speaks to a market that's on edge about a potentially reassuring NFP on Friday.  The default expectation is for more and more labor market slack to be showing up.  If it doesn't, bonds are vulnerable to more selling.  If it does, the lower boundaries of the recent rate ranges are already well established by the pre-Fed trade. Econ Data / Events ADP Employment 143k vs 120k f'cast, 103k prev Market Movement Recap 08:27 AM Weaker overnight and after ADP.  MBS down an eighth and 10yr up 5.4bps at 3.787 11:41 AM Bouncing back somewhat.  MBS down 3 ticks (.09) and 10yr up 5.9bps at 3.792 (previously as high as 3.817) 01:58 PM MBS nearly back to unchanged, down only 1 tick (0.03). 10yr still up 4.3bps at 3.776 03:43 PM Friendly bounce has run its course.  MBS down 3 ticks (.09).  10yr up 5.3bps at 3.786

Mortgage rates moved higher today after an employment report suggested that Friday's forthcoming Employment Situation (the BIG jobs report) might come in slightly better than expected.  The report in question, ADP Employment, is always released 2 days before the big jobs report and it's designed to align with the key headline of that report: nonfarm payrolls.   ADP's payroll count was only slightly higher than the market expected today, but that was enough for traders to sell bonds, thus pushing yields/rates higher.  Thankfully, mortgage-specific bonds performed better than the rest of the bond market, thus limiting the upward movement in mortgage rates.  Nonetheless, the average lender is back up to the highest levels since September 9th. While that is getting pretty close to a full 30 days, mortgage rates are still a far cry from the levels seen during the first few days of September.  Moreover, there hasn't been a ton of movement after the 9th, so it didn't take much of an increase to get us back to those levels.  The average lender has been in a narrow range of about 0.125% the entire time. All that having been said, the reaction to today's ADP report suggests the market is very willing to have a big reaction to Friday's jobs report.  It's very true and very important to understand that there's no way to know how the jobs report will come out until it is actually released.  The market has already adjusted to everything that can be known about the future.  All we know is that volatility potential is elevated significantly heading into the end of the week.