MBS were up 9 bps early. Stocks were flat

Bonds were modestly weaker in the overnight session, but have bounced back into positive territory following the much weaker than expected jobless claim numbers.

Jobless Claims = 261k vs 235k f’cast (233k prev)

Continuing Claims = 1.757m vs 1.80m f’cast (1.794m prev)

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.

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.

There have been several days recently that have resulted in financial markets upping the odds for the Fed keeping rates higher for longer.  The most recent spike in those expectations followed yesterday’s BOC (Bank of Canada) announcement–not because BOC policy has an impact on US rates, but due to the proof of concept for the Fed’s upcoming meeting.  Perhaps it wouldn’t be worth the Fed hiking instead of pausing, but could it be worth slightly different answers on the dot plot?  Some traders thought so.  Now Thursday’s data shows the downside of economic headwinds.  Jobless Claims jumped to the highest levels since 2021.  The reaction erased the move seen after the BOC announcement, but end-of-year rate expectations remain elevated versus levels seen in early May.

At the end of the day, MBS were up 34 bps.  Stocks up 26

Some data about the current mortgage universe by rate range

Interesting article from Housingwire: Median income earners can only afford 25% of current listings https://www.housingwire.com/articles/median-income-earners-can-only-afford-25-of-current-listings/

It is no secret that housing inventory is low. As of June 2, there were 433,104 single family homes on the market nationwide, according to data from Altos Research.

And while this situation is certainly far from ideal, according to a report published Thursday by the National Association of Realtors and zillow, even with the existing level of homes available for sale, the housing affordability and inventory shortage issues wouldn’t be so severe if there were enough homes for buyers at all income levels.

In April 2023, data from NAR and Zillow showed there were roughly 1.1 million homes listed for sale. Of those 1.1 million properties, 25% had a price lower than $256,000, which is the maximum price of a home that households earning the national median income of $75,000 can afford.

Over half (51%) of U.S. households earn $75,000 or less, meaning that in a balanced market, 51% of the homes for sale would be affordable to buyers in this income bracket.

Based on the report, the housing market needs an additional 319,460 listings priced under $256,000 in order for the market to be balanced. In other words, the U.S. needs to add at least two homes that are affordable for middle-income buyers (up to $256,000) for every home that is listed above $680,000