Mortgage rates are a function of supply and demand, and there’s a lot of supply. The market produced $734.5 billion of new single-family MBS backed by newly minted home loans during the second quarter, a 57% increase from the previous period. Primary market originations were also up, but by a lesser 38%. The resulting securitization rate for the second quarter was 79%, a big jump from the 70% rate in the first quarter.
Last week we saw economic data supporting expectations of a strong rebound in GDP when the advance estimate is released later this month. 661,000 jobs were added in September, below market expectations and continuing the trend of monthly declines following June’s massive 4.8 million net new jobs. 12.5 million people remain officially unemployed and the unemployment rate dipped to 7.86 percent as nearly 900,000 workers left the labor force. Initial jobless claims remain roughly four times higher than pre-recession levels at 837,000 for the week ending September 26. The expiration of the CARES Act brought a decline in nominal income of 2.7 percent in August as enhanced unemployment benefits came to an end. The personal savings rate remained above its pre-crisis level at 14.1 percent though lower than its peak of 33.6 percent in April. Inflation adjusted consumer spending increased in August. Total mortgage purchase applications dipped, led by refi apps being down 6.5 percent for the week ending September 25 although bother remain well above their pace from one year ago. Rates continue to remain low and housing inventory remains tight in many parts of the country.
We all expected to see moves in the bond market from the September payrolls report on Friday, but we were thrown a bit of a curveball when President Trump revealed that he had tested positive for the coronavirus, which increased uncertainty to the week’s chaotic news cycle. Treasuries ended Friday pulling back in curve-steepening fashion while the UMBS30 basis ended the week mostly tighter. In Washington, House Speaker Pelosi indicated that aid to airlines is forthcoming, but a broader deal has yet to be reached.
The September jobs report underwhelmed on most fronts, pointing to a slowdown in hiring as job gains slowed in September, a drop in the labor force participation rate as many Americans quit looking for work, a jump in the number of unemployed for 27 weeks or more. The pace of layoffs remains high, and total employment remains 7 percent below its February level. It should be noted that government employment fell by 216,000 this month, driven by large declines in the state and local education sectors. Hopefully that changes with more schools transitioning back to in-person learning. Markets also received a better than expected Michigan Consumer Sentiment Survey for September although it never moves rates.
The economic calendar is quite light today, though it begins shortly with the final September Markit Services PMI which will be followed by ISM non-manufacturing PMI for September and the September Employment Trends Index. We also have some Fed speak ahead of the release of the FOMC minutes later this week, with Richmond’s Barkin, Chicago’s Evans and Atlanta’s Bostic taking the virtual stage. Things pick back up tomorrow with the August Trade Balance and August job openings. The midweek session sees the September FOMC Minutes and August Consumer Credit before Thursday’s heavy calendar, which includes the September NFIB Small Business Optimism Index and $23 billion 30-year Treasury bond reopening results. The week closes with August Wholesale Inventories. The Desk is scheduled to conduct three operations today, including two in Class A. The operations will total up to $7.3 billion starting and ending with $2.9 billion UMBS30 2% and 2.5% with $1.5 billion GNII 2% and 2.5% in between. We begin today with Agency MBS prices nearly unchanged from Friday’s close but the 10-year is yielding .72 after closing last week at 0.70 percent.
Market Commentary by Rob Chrisman
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