Stocks are flattish this morning on no real news. Bonds and MBS are up.
The Bank of Canada unexpectedly hiked rates 25 basis points yesterday, triggering a sell-off in global sovereign debt. Fears about the impending sale of $1 trillion in T-bills isn’t helping things either. The yield curve inversion has increased over the past couple of weeks:
Rate lock volume fell 16% in May compared to April according to MCT’s Rate Lock Index. Purchase volume was down 15% while refi volume fell 22%. Overall lock volumes are down 29% compared to last year. MCT’s lock index is more reliable than the MBA’s mortgage application index in that it eliminates the multiple application problem for a single loan. Regardless, times are tough out there in the mortgage space.
Initial Jobless claims increased to 261k last week. This is the highest level since October of 2021. While claims are still low on a historical basis, it looks like the Fed’s tightening policy is getting some traction in the labor market.
Overall, the groundwork is being laid for lower rates going forward. The Fed Funds futures still see a 70% chance for a pause in June. Student loan repayments will resume in August, which will crimp consumption. The Eurozone economy is officially in a technical recession, and the ISM data shows US manufacturing is contracting and the services economy is slowing. Increased capital requirements for banks will push long-term rates down, at least at the margin. Notwithstanding the jobs report last week, the evidence is pointing towards a cooling labor market. The volatility in the bond market (measured by the MOVE Index) is falling again, which should help MBS spreads. While it is hard to be optimistic in the mortgage space right now, the second half of 2023 should be better than the first.