Morning Report: Futures predicting another cut in two weeks

Vital Statistics:

 

Last Change
S&P futures 3039 -70.25
Oil (WTI) 46.46 -0.29
10 year government bond yield 0.94%
30 year fixed rate mortgage 3.28%

 

Stocks are down again on coronavirus fears. Bonds and MBS are up with the 10 year trading below 1% again.

 

The Fed’s rate cut doesn’t seem to be having the desired effect. Volatility in the markets continues, and to be honest, I don’t see how cutting interest rates is going to make any difference. The markets don’t have a credit availability issue, and lower rates aren’t going to entice people to take a cruise all of a sudden. The Fed is also running out of ammo if we do experience a recession.

 

Speaking of rate cuts, the Fed Funds futures are handicapping a 50% chance of a 25 basis point cut and a 50% chance of a 50 basis point cut at the March meeting in two weeks. The December futures are assigning a 27% chance we go back to zero.

 

fed funds futures

 

The Coronavirus has certainly been a double-edged sword for mortgage originators. The MBA Mortgage applications index increased by 15% last week as purchases fell 3%, but refis rose 26%.

 

“The 30-year fixed rate mortgage dropped to its lowest level in more than seven years last week, amidst increasing concerns regarding the economic impact from the spread of the coronavirus, as well as the tremendous financial market volatility,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Refinance demand jumped as a result, with conventional refinance applications increasing more than 30 percent. Given the further drop in Treasury rates this week, we expect refinance activity will increase even more until fears subside and rates stabilize.”

“We are now at the start of the spring homebuying season,” Fratantoni added. “While purchase applications were down a bit for the week, they are still up about 10 percent from a year ago. The next few weeks are key in whether these low mortgage rates bring in more buyers, or if economic uncertainty causes some home shoppers to temporarily delay their search.”

 

 

If the March Fed Fund futures are correct, we could be looking at mortgage rates with a 30 year fixed rate mortgages with a 2 in front of them. While this could generally be a good thing for mortgage bankers, people that hold mortgage servicing rights are about to get a 2×4 to the side of the head as prepay speeds accelerate. And their broker dealers are asking for more margin as rates rally. The best of times, the worst of times…

 

Optimal Blue, the loan pricing engine many bankers use has experience record volume and has been experiencing latency issues as a result. Unfortunately Optimal Blue was making some tech migrations when all of this hit.

 

The CFPB may get its wings clipped at the Supreme Court. At issue is whether the President can replace the Director of the CFPB without cause. The Trump Administration is siding with the Plaintiff in this case and is refusing to defend the Agency’s structure. The House has sent its general counsel to defend the agency. While SCOTUS probably won’t go so far as to rule that the agency be disbanded, it is likely to rule that the President is free to appoint a director that shares his ideology.

 

 

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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