Capital Markets Update
 

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Week of September 9th, 2024

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U.S. Treasury yields fell across the board last week, and mortgages tagged along for the ride. Growth concerns, softer-than-expected July job openings, and the mixed non-farm payrolls report all suggested the potential for a slightly slowing economy, which in turn leads to lower rates. Analysts can yammer and predict whether it’ll be 25 or 50 basis points next week.

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Just as importantly, if not more so, the yield curve between U.S. 10-year and U.S. 2-year briefly normalized for the second time in over two years, after un-inverting last month for the first time in 25 consecutive months. An inverted yield curve is widely seen as a recession indicator, but normalization of the curve is not necessarily a positive sign as the curve can un-invert before a recession hits.

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Rate cuts are coming, but the August jobs report that was released on Friday did little to settle the debate if a 25-basis point or 50-basis point rate cut will be the move. Chatter out there is that 50 basis points may be more likely, but 25 basis points is much more sensible. Firms continued to hire in August and the economy kept expanding: The economy added 142k jobs last month, which was below the 160k consensus estimate. As usual, the previous two months were revised downward, this time by a cumulative 76k. Attention is already turning to this week’s CPI report to end the debate on the degree of easing, but the Fed certainly seems intent on “spiking the punch bowl” again.

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This first full week of September brings key inflation updates as well as the $199 billion mini-Refunding to be held over Tuesday to Thursday. On inflation, the CPI and PPI will be released on Wednesday and Thursday, respectively, with import prices on Friday. Other reports of note include wholesale trade, consumer credit, small business optimism, the budget statement with Michigan sentiment on Friday. No Fed speakers are currently scheduled with the Fed in its blackout period. Regarding MBS, Class A 48-hours is on Thursday after Agency prepayment releases to close last week.

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Today’s economic calendar kicks off later this morning with wholesale inventories and sales for July along with the August Employment Trends Index. After that, the New York Fed will release their Survey of Consumer Expectations and July consumer credit will be released in the afternoon. We begin the first full trading week of September with Agency MBS prices slightly worse than Friday’s close, the 10-year yielding 3.75 after closing last week at 3.71 percent, and the 2-year at 3.69.

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Commentary by Rob Chrisman