Solid start to Fed Day, with UMBS up 13 bps.   S&P Futures up 16.5 points

2am ET brought inflation data for Germany and the UK. Both were cooler than expected.  Due to base effects, German PPI is able to make the headline-grabbing claim of “biggest price drop ever” (made possible by the largest increases ever last year that are now falling out of the 12 month total). Bonds didn’t actually seem too impressed, but there was definitely a reaction.  Gains continued throughout the EU session.  US traders were initially sellers at the 8:20am CME open, but that was short-lived.

Joel Kan, MBA’s Vice President and Deputy Chief Economist expects mortgage rates to fall into the 6% range by the end of the year and into the 5% range in 2024. I agree with him and I believe the driver is going to be a decline in interest rate volatility which will positively impact MBS spreads.

The Fed came through with their Hawkish Pause.   No change for now.

Today’s Fed announcement was largely as expected: no rate hike, “data dependent,” and “higher for longer” communicated via the dots.  The direction of the change in the dot plot is no surprise, but the magnitude was.  The median Fed member moved their forecast up by 0.50% through both 2024 and 2025.  Granted, those forecasts have a poor track record of predicting the future, but they speak to the Fed’s will to continue hiking if the data remains resilient. Bonds held their ground reasonably well at first, but late day position squaring resulted in a break to new long term yield highs.

MBS closed down 30 bps.

From 2/17 through 2/22, the percentage of pending home sales that fell out of contract declined from 13% to 11%, except for 3/20 and 4/20 when it exceeded 16%. From 3/22 through 9/22, as rates quickly rose, the failure rate jumped from 11% to over 16%. From 9/22 through 1/23, rates fell and the percentage dropped from 16% to almost 13%. Now with rates rising again, failures are approaching 16%.