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Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
Rate sheets this morning should be similar or just a smidge better than yesterday, as this morning’s inflation data comes in exactly at expectations. However, coming in at expectations is not enough to spark a rally and see better pricing. Reprice risk on the day is low, bonds aren’t likely to start selling off, but we are likely to hold steady as traders wait for the third shoe to fall tomorrow from the Fed. The outlook now though is that this rally has run out of wind in the sails, and loans should start looking at locking. As I’ll repeat below, the only reason I’m not suggesting to lock everything closing in the next 30 days is that the Fed action is in the afternoon when we can lock before things get too bad and we’re hoping for a hail mary from Powell to save the day… but this is unlikely.
This morning’s CPI inflation data came in exactly as forecast. Consumer prices picked up in November, with the core reading coming in at 0.3% after coming in at 0.2% in October. The year over year core was 4.0% for a second month. Although inflation has pulled back from the highest levels in 2023, the still strong labor market and resilient economy means it isn’t likely to move much lower yet. And that means that even though the Fed is likely done raising rates, it won’t be cutting anytime soon despite what markets want.
We’ve now seen rates whiff on two out of three big opportunities in the last few days, and that has to get our attention. Tomorrow we get the third at bat… the Fed meeting and press conference. If this wasn’t happening in the middle of the day, I’d already be suggesting to lock up a good portion of the pipeline. The rally that started at the beginning of November is now showing serious signs of fatigue, and we are unlikely to see rates improve much unless we get a surprise shot in the arm from tomorrow’s Fed meeting. Since that meeting concludes with the Fed policy statement at 2pm Eastern and the more impactful press conference from Fed Chair Jerome Powell at 2:30pm ET, we can float into it to see how bonds perform and rates react.
What just a week ago looked like an event that would be great for rates has now lost its luster. There is much less of a chance that this Fed meeting will help bonds continue to rally at this point. The Fed doesn’t want to let markets off the hook too fast about future rate hikes, so without the ammunition from weaker jobs data and better than expected inflation we are unlikely to get messaging from the Fed that helps bonds. Markets want to hear things that point to the Fed cutting rates sooner, like in March. However, it is more likely that the Fed (especially Powell at his press conference) continues to beat the drum that the Fed isn’t going to rush to cut rates and wants to see inflation fall more instead. That’s not going to spur any big improvement in bonds, which means rates and pricing aren’t going anywhere.
Loans closing in less than 15 days should cautiously float. Like I said above, if the Fed action was before pricing came out tomorrow we would be in a locking stance, however since it comes out later in the day we can hedge our bets and see how it plays out. However, I no longer believe that we will see a favorable outcome, now that the jobs data and inflation data were a bust. Be ready to lock these loans, especially if you won’t be able to lock them before a negative reaction tomorrow.
Loans closing in 15-30 days should cautiously float. However, we want to be ready to lock tomorrow at the first sign of trouble or if we don’t get a favorable reaction after the Fed meeting and press conference. It looks like we’ve seen the best rates we’re going to see to end the year without some surprise help tomorrow.
Loans closing in 30+ days should cautiously float. These loans don’t necessarily have to rush to lock like the others should, but may want to take the offer on the table if tomorrow doesn’t go well. However, loans that have 30+ days until closing have another shot at seeing weaker labor and economic readings before the next Fed meeting in January. There is some likelihood that rates may creep higher for a bit after tomorrow’s meeting is over, but we should then see them fall again.
Technicals:
The UMBS 6.0 coupon is at 100.69 after the dust has settled a bit from the CPI reading. It is likely we see mortgage bonds stagnate a bit ahead of tomorrow’s Fed meeting, where we likely see some big swings during the policy statement and press conference before finally seeing where things fall into place.
The 10yr Treasury yield at 4.22, a bit better than yesterday but higher than the lows reached in overnight trading. It looks like 3.xx is off the table though, and that 4.11 is a resistance level we’ll need to see broken before we start looking for more.
