How Tariff-Induced Volatility is Impacting Market Rates | March 17, 2025

Jim Glennon: 00:01:10

Welcome to Optimal Insights, your weekly source for real time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize.

Alex Hebner: 00:01:19

Your profitability this week.

Jim Glennon: 00:01:25

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, Vice president of hedging and Trading client services at Optimal Blue.

Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Hello, everybody. Welcome.

Thanks for being here. We've got a great show as always for you today. Doing a little bit of a special session we're recording on Friday.

Alex, Ben and I are going to freestyle a little bit on current market conditions, especially a lot of the market volatility that we've been seeing this last, especially this last week and some of the recent events that are contributing to that, mostly from the new administration, but also some of the, the econ numbers that are coming out and some of the confidence numbers that we've seen. So welcome. Welcome, Alex and Ben, good to have you here. Thank you.

Ben Larcombe: 00:02:22

Thank you.

Alex Hebner: 00:02:23

Thank you. Pleasure to be here.

Jim Glennon: 00:02:25

Before we get into that, a couple things to cover as far as data. Just our pricing engine Data still seeing conventional 30, you're right around 6.6, so still approaching the six and a half mark we've touched.

Kind of bounced off six and a half, so still really the lowest we've seen this year. Not quite as low as we saw in the fall, but consistently lower than what we've seen kind of on average for the past couple years.

And just keep in mind that magic number, right? 6% almost no matter who you ask at this point, there's enough of a vintage of loans that are well above 6% out there.

There's also just kind of this ongoing feeling that the, you know, the lock in effect is starting to wane a little bit if we reach a certain level, whether it's a purchase or a refi.

And then again, just the issue of, you know, consumers potentially needing to unlock some equity from their home, whether they're selling or refinancing. So 6% seems to be that number. And as we get closer to that, we are seeing volume quite a bit higher.

You know, we're, we're above levels that we saw before the pandemic at this point pretty consistently. So keep an eye on that.

And before we move on, we wanted to, to touch on the redfin Rocket acquisition that was announced this week, pretty huge deal, you know, in the billions in terms of dollars, but also, you know, two major players in real estate and obviously in mortgage and just in like home finance. So we thought it was worth mentioning here.

We don't, you know, obviously don't have a strong opinion on where it goes from here, but it certainly is a, a consideration when thinking about consolidation in, in our industry, which is, seems to have been ongoing since the pandemic kind of ebbed a little bit, you know, but in terms of timing, you have to think right now with everything going on, could it be a move to position for the next boom in mortgages? Who knows? That's always kind of the way we think because we're in the mortgage industry.

Certainly a good partnership, you would think, just in terms of efficiency, just getting closer to prospective borrowers, getting closer to home buyers. So there's probably a lead generation play in there, obviously. I don't know.

Alex, Ben, do you have anything you might add to that or ways that you would think about this?

Alex Hebner: 00:04:30

Yeah, I think you hit the nail on the head there. Just, it's a, it's a natural fit if you're, if you're an originator, you want to optimize your, your lead generation. And I think Redfin fits well.

They have, they have a national footprint the same way Rocket does. And if you're browsing for homes, it allows you to quickly plug and play with lending options.

Ben Larcombe: 00:04:48

Yeah, yeah, I think it's a lot of it is just trying to bring kind of a formerly fractured home buying process all in under one roof and try to bring some efficiency. We know profitability will certainly be a key factor in those decisions for Rocket as well.

So, yeah, certainly an interesting play and probably not the, the only move we'll see in, in that direction.

I expect we'll probably see more similar news in, in the coming years that to kind of similarly streamline and make that home buying process more efficient. So.

Jim Glennon: 00:05:27

Right. Yeah.

I mean, it's a technology play and I think Rocket's pretty heavy and I think they have a consumer app that's pretty well circulated and it makes sense that all these things would work towards just an overall lower cost.

We mentioned on a couple podcasts ago about conferences we've been to recently where there's still tons of discussion around what it costs to produce a loan right now, and it's still, you know, over $12,000, which is the highest it's ever been. Mortgage companies are trying to get down to that.

You know, eight, $9,000 level, which can be a handful of basis points that can make you a little bit more competitive. So anything you can do to streamline that through consolidation could be a way to get ahead.

All right, let's move on to our favorite subject, which is market volatility. Okay, well, let's just get right into it. This week has been wild to say the least. Last week was pretty crazy as well.

We've seen minor meltdown in the equities market where you know, we're in correction territory on some of the major indexes. Although today, Friday we're up a little bit. It's been bouncy, but today's been a positive day. Have not seen as much volatility in bonds.

But it is likely that a, you know, more than half of the impact on the market right now is due to tariff discussions. But there's a lot more going on.

You know, there's a lot of data that's coming out recently or even if you look back a couple of quarters that's not particularly favorable to the economy.

So kind of have this confluence of things going on which generally feeds into the thesis that we've been running with for the past couple of quarters too, which is you have a naturally slowing economy, naturally slowing job market.

Then you have the new administration coming in and putting a little bit more pressure on that, potentially intentionally or at least knowingly it's obvious didn't expect immediate positive economic activity from some of the, the policies that are going into play.

But we're just going to talk through some of that today and just give you some things to be sure that you're, you're focused on and give you an update on some things that we've seen this week and why there's so much volatility in our 401ks happening right now. I think, Ben, like consumer confidence, that was the big one today. Right.

And that's kind of one of those numbers that when things start to turn that economists look at a little bit closer because it can tend to be a weird feedback loop or even a self fulfilling prophecy.

Ben Larcombe: 00:07:58

Right.

Jim Glennon: 00:07:58

Where just the mood of the consumer can mean a lot.

Ben Larcombe: 00:08:02

Right? Yeah, consumer sentiment, it can always have that effect and you know, sometimes it doesn't, but sometimes it does.

So it's kind of hard to pin it down as like the, you know, one of maybe the top level into indicators for the economy. But you're exactly right. It certainly can, you get some bad consumer sentiment reading.

It can kind of build on itself and before, you know, it you're in a recession. Yeah.

e lowest level since November: 2022

So pretty much on every spectrum people see higher inflation. Higher inflation. You think tariffs have something to do with that? So not a great sign. They're probably leading to the drop in sentiment.

But again, it is survey data. So I think you always have to put an asterisk near it and how much stock do you put into it.

But we have been getting very consistent weak sentiment data. It's not like this is one report that is out of the blue. Like what are we at four or five kind of sentiment indicators showing real weakness.

So something's definitely up out there. Whether it's just in people's psyche or not I think is remaining to be seen.

And you mentioned Jim too, like after the election, dramatic shifts in sentiment depending on people's political preferences. So we could be seeing some noise on that as well. So I think keep that in mind.

Like people tend to view the economy and purchasing power through the lens of their politics sometimes, which is not necessarily an objective way to view it.

Jim Glennon: 00:09:53

Yeah.

And it, it feels like just generally the volatility is causing people to have a little bit of a, a negative viewpoint or outlook on what the economy is going to look like. Right. And it, and it did make its way into the data. Right, Alex, that like the spending is negative for the first time in quite a while. Right.

Alex Hebner: 00:10:11

Spending is down.

And to Ben's point about how we've kind of been tracking the political shift over this election season and we did see inflation expectations reversed between the two main political parties.

But for this consumer sentiment reading, actually all three groups that Republicans, Democrats and Independents that they survey for consumer sentiment, all of them went down. Granted, they went down in different magnitudes. Republicans it was about, down about 10%, Democrats 24%.

But across the board we saw decreasing sentiment for consumers. It is a forward looking metric.

And how much can you put into essentially calling someone up and asking them where do you think the economy is going to be in six months? But I think tying into what you were talking about with the equity market sell off, that there is a real psyche element to all this.

And it's as little as, you know, oh, I saw my 401k, you know, contracted by 4 or 5% in the past two, three weeks. You know, that has a real wealth effect for people.

And that can cause, you know, millions of households to say, hey, you know, let's not eat out this weekend. You know, let's stay home and cook. And that is how it feeds into the real economy.

Jim Glennon: 00:11:24

Right. It doesn't take much. Right. For people to back off spending. And it does seem like that's becoming reality.

And there is some consensus across all the political parties that we're not loving at least the uncertainty maybe right now. Right.

There's just this kind of built in uncertainty with, you know, one week it's, it's 50 tariffs, the next week cars are not included in that number the next week kind of and so on. Right. Why don't we start getting into a little bit of what this could look like? So, I mean, GDP projections are also way negative at this point.

We've talked about it for the past few weeks. Right. The Fed has reduced their GDP projections because of the tariff discussions.

You've got Doge, which is another influence happening on the market right now. At least that's going to put some pressure on probably the mood of the consumer also. But also unemployment.

All right, So a lot of these things pointing towards potential recession.

And again, maybe we already had a recession brewing early on, even before the new administration took office, because there is a bit of a lag there and there has been a pretty hot economy for the past, you know, since the, the middle of the pandemic.

And as we've said on this podcast, and you've probably heard elsewhere in the industry, it's possible or even likely that the government is looking to have a little bit of a mild recession or that are at least okay with it.

And totally know that, you know, these moves that are being made are going to cause that kind of disruption in the short term, which again is good for rates. Rates go lower from here. This all plays out this way. And obviously we want to get into, you know, get into position to capitalize that.

If we're in the mortgage industry, which, which most of us are.

Alex Hebner: 00:13:15

I full heartedly agree. I think this week kind of the mass maybe came off a little bit on that strategy.

I think, you know, we saw Lutnick and Besson and Trump all say, who cares about the stock market? It's a little, it goes up and down. You know, this is, this is to be expected. So.

So absolutely, I'm in the boat that they, their goals outweigh the short term pain that could be caused here.

Ben Larcombe: 00:13:36

Yeah, I mean, I think you got to my BS Flag goes up A little bit when you hear that. We know they'll be cheering the stock market as soon as it's back to all time highs, but I think you got to expect that from politicians.

That's nothing new. But yeah, I think a recession in the short term is definitely being considered by markets.

I think one of the questions is, okay, what inflation impacts do we get from these tariffs? Is it going to be transitory? I hate to bring that word up again. That's a, that's a touchy word for a lot of folks.

But is it kind of great last time, but is it. Yeah.

Do we get like a short term, one time increase in some of these inflation metrics from tariffs or does it actually stoke, you know, something that's actually going to cause inflation to rise at a higher rate for longer. That remains to be seen. And also, just what, what is growth going to look like longer term?

Because you're right, like in the short term things don't look all that great.

But you know, maybe some of this Doge stuff, maybe more, a more efficient government, more, less crowding out from the government in the private sector and private sector could really ramp up. Maybe we see higher growth long term which could eventually lead to higher yields. So yeah, I think bonds are kind of trying to grapple with all that.

Like maybe we could see a fed cut or 2 or 3 this year because of a potential recession. But also what is the long term impact of this? And maybe the yield curve just ends up steepening and those cuts really help out on the short term.

Longer term, maybe yields just kind of hang out and then in the mortgage world, we're probably caught somewhere in the middle there a lot of, a lot of things to, to watch there.

Jim Glennon: 00:15:29

You know, so much of it revolves around unknowns on tariffs right now. Right. So not just if, you know, when tariffs go in in certain places, how long will that last? Will it be immediate?

Will it be gradual, will it go on forever?

But there's also like, we have kind of no idea what the magnitude is of tariffs at this point because it's become, it's gone from something that was initially thought of and talked about as very simple. There were threats to impose tariffs in exchange for consideration on certain needs or political negotiations. Right.

Whether it was around illegal immigration or fentanyl or fair trade practices in the case of China.

But now we're in this very much, especially this week, back and forth mode on what's going to be taxed, what is not, what are the, the more far reaching implications of those Taxes. And I'm still, I mean, it is moving pretty fast.

So I'm still a little bit confused about it, but I have been doing a lot more research and it, there's like different groups that some of these goods fall into. When we're talking about tariffs, right.

You've got things like, like, like it was just yesterday there was an announcement that there would be potentially a huge tax put on alcohol from Europe. Right. Champagne, other types of booze coming in from Europe. There'd be a 200% tax.

And that's the kind of thing where you could argue that there's a replacement opportunity to buy something that's domestic. Right. It's a little bit simpler for me to think about.

You know, California makes wine, although I think they import some grapes and other things from other countries. But anyway, assume they didn't. That's a simple replacement.

But then you look at things like autos, which I didn't realize until I did some research that the number one import into the US and export to Canada and Mexico is automobiles and automobile parts. It's more so than oil, it's more so than food and all these other goods. Right.

There's so much money that crosses the border for automobiles that, that's why there's been some focus on certain exemptions for automobiles. Because there's, for instance, a lot of cars that Detroit makes in Mexico and then imports them back over the border. Right.

So you're potentially a tariff on Mexico for sending cars to the US Actually hurts gm, right. Which is like. And, and then some of the parts for that car come from Canada.

So it really starts to blow your mind how many times pieces of a car or an entire automobile crosses the border, how many times it gets taxed and how that almost can't be sustainable or can't not lead to a major increase in automobile prices. Right.

Alex Hebner: 00:18:17

And that's exactly, I think, why we saw the immediate repealment of plans to put in, in the automotive tariffs. Like you said, the, the big three in Detroit cried uncle really fast on that because they said, this is going to decimate our business.

You can't do that with Canada and Mexico. It's just, it's too integrated.

Jim Glennon: 00:18:36

Right. And that's again, what's causing the volatility in the markets.

On one day everybody thinks that's actually going to happen and they realize how kind of damaging that would be. And then the next day it's like, hold on, that seems to be the case this whole time. Right.

We're kind of starting out with the threat and saying okay, tariff on and then letting the negotiations happen after that, which again, I think volatility is our friend. It is a little disruptive and it's disruptive to the people who work for these companies, obviously.

But it seems to be doing good things for interest rates.

Alex Hebner: 00:19:08

Yeah, I would agree, I would agree.

I think long term these companies know some form of tariffs are coming, that there is a goal by the administration to reshore some percentage of production and create jobs and labor through that. But I don't think the nightmare scenario will hit in regards to all the tariffs being put in place.

There's a lot of noise with the news regarding these tariffs. We see blanket statements and then blanket repealments back and forth. And this goes for the job cuts as well.

You know, we see, oh, tens of thousands of jobs axed here a week later, Judge Halt's order. And it's really hard to cut through all that noise and get to what is actually in place.

How many people have lost their jobs, what percent tariffs are in place.

And so far the tariffs have been there are new tariffs, but they're not Again, like I kind of said there, the nightmare scenario that is coming early April when that deadline that Trump said for April 2nd hits for Canada and Mexico. Both Sheinbaum and Trudeau came to the table, got him to suspend for an additional month. We'll see, we'll see how the cards fall in April.

I, I, I can't say one way or another how that's going to land if it happens.

Jim Glennon: 00:20:29

I think you hit it right there, Alex, when you, you said we, all these companies know some we're going to land somewhere. It's like a game of pingpong right now, right? It's going to be 200%, it's going to be 20%, it's going to be 50, it's going to be 15.

We're going to land somewhere. So right now we're in the middle of that game of Pong and it's, it's kind of banging up people's 401ks a little bit.

But again, maybe for the better in the long run. And with interest rates, it does seem to be neutral to positive.

Ben Larcombe: 00:20:54

I would say when you, you got to think the longer this goes on, I think businesses, you know, even small businesses, large businesses, probably holding off, making big investments, big decisions until there's a little more clarity around some of this policy.

And I think once you, the longer that holds off, I think you're, it almost feels like the administration could be forcing their own hand a little bit here too. And you know, maybe a 10% stock market correction and where we're currently at is not enough yet.

But I think if you, you kind of don't get some resolution or at least some clarity so markets and businesses can, can plan for the future, you risk running that into a 20% stock market correction and still businesses holding off investment and eventually the clamoring from people saying, hey, why are we doing this? Is going to get loud enough that you're going to have to do something. And so, yeah, we'll have to see how all that plays out.

That could lead to a recession here in the short term and that's certainly going to lead to a safe haven bid in Treasuries, which were already starting to see, as Jim has said.

Jim Glennon: 00:22:06

Right. Okay. Anything else on tariffs, gentlemen?

Alex Hebner: 00:22:11

I think just one other thing to keep in mind as a potential goal for the administration that hasn't, I don't think been explicitly stated yet, but a lot of people are hypothesizing is that the federal deficit is reaching its limits. You know, we're seeing stopgap measures.

I think there's one being voted on today that should pass now that Democrats have agreed to, I believe, the final they need to have a full budget by September and there will be some refinancing of debt during that time as well. They'd like to refinance that debt at the lowest possible rate.

And so maybe look at this as like a six to eight month time span of when they're going to keep rates suppressed with a forceful non Fed intervention playbook.

Jim Glennon: 00:22:55

Right. Yeah, it does seem to be part of the agenda. Getting rates lower and that cures a lot of ills. Right. And getting energy prices lower.

All right, so let's move into last couple of things. Just inflation in general. Actually had some decent numbers come out this week. Right. They were a little bit below expectations.

Neither of them was hot. Month to month looked good, Tariff affects, tbd obviously, but you know, nothing really notable with inflation data this week.

So that allowed, I think rates to remain at a decent level. And that's right before the Fed meeting. So Fed meets Wednesday, they won't cut rates.

I think that's pretty much baked in at this point unless there's a major announcement or calamity between now and Wednesday. So I mean, what, how should we be thinking about the Fed right now? Does it feel like they could be in the same headspace as the administration? Right.

They aren't supposed to look at gdp. They're Just supposed to look at inflation and look at labor. Inflation is maybe 3% is the new 2%.

We've talked about that and with between doge and between the economy slowing down and some of the details we saw in the unemployment report last week.

Maybe the Fed knows they're going to be forced to act at some point here in the middle of the year if we see an unemployment rate that gets to 4.3, 4.4%.

Ben Larcombe: 00:24:21

Yeah, I think they're, we're getting to a spot where I think some Fed cuts are definitely back in the picture. I, I think cme Fed watch. I, I think June is kind of a big point for that where we could see the first one again.

A lot of data etc still to come there.

But I think, I think the big lingering elephant in the room continues to be, you know, what, what tariffs are going to do to inflation at least in the, the short term. And even if we got, even if it is just a one time spike in inflation, I think that's gonna probably push them more towards the keep rates here camp.

But you're exactly right, Jim. We also know the labor market is going to weaken. You know we're seeing it real time.

It's going to start showing in the data here in the, the next few jobs reports. So it seems like it's a matter of time before they're going to have to, to cut a bit. But yeah, the exact timing I think will be a little clearer.

Alex, what are your thoughts?

Alex Hebner: 00:25:21

I think, I don't think they're quite there yet. I, I agree they're not quite there yet. I think the labor market needs to get more painful before any rate cuts come into play.

I was, you know, I'm still in the camp that they're going to play this hawkishly. They're coming off of three years of people screaming at them about inflation.

As we know, the Fed doesn't make sudden moves and Powell in all of his testimonies has really toed the line. We're data dependent, we're data dependent. We are not going to let the administration or any wing of the government tell us what to do.

Our job is to keep the economy in an optimal position. So I'm in the same boat. I would say let's see how it evolves. We do see a cut currently predicted for June.

If 3% is the new 2% and we see labor numbers move in the same direction, they have been probably at a, you know, at an increasing pace of layoffs then, then yeah, I could get behind a June cut.

But for the time being I think that they're too static of an institution to, to really give the administration everything they want in, in the form of one to two cuts before the fall.

Jim Glennon: 00:26:35

Right. Still too much risk on the upside for inflation.

Ben Larcombe: 00:26:41

Yeah, I think you touched on something interesting too. Like they would never admit this, but I think everyone's kind of thinking it. Like they seem to be a little bit of a foil to the administration.

Like I don't, I mean I don't think there's anything explicitly there, but I think they're, yeah, they're kind of, in a lot of ways they're trying to be the opposite. They're not trying to be chaotic or ultra reactive.

I think, you know, they're, and this isn't anything new from the Fed, but definitely trying to think of a longer term view here. So we'll, I think that'll be an interesting dynamic to watch going forward.

Jim Glennon: 00:27:17

So definitely. Yeah. I mean if the 10 year is going to kind of hang around here, you know, the other thing we'll have to hope for is just tighter spreads. Right.

I think there's, that's continuing to happen spreads between mortgage rates and treasury rates.

Obviously it would help if the Fed cut rates a little bit so banks would get a little bit more interested in borrowing cheap spending money on, on mbs. But for now it's really just folks that are looking for yield are seem to be pouring more into mortgages which is helping us out.

All right, so just to summarize, there's a lot going on but volatility is our friend. That's to me that's a big message that's out there. You know, watch the balance between tariff threats and actual action. Right.

The ping pong game we talked about. So I mean results are going to be TBD and, and the true results of tariffs is going to be way out in the future.

You know, what is it actually going to do to prices? As we said, companies know tariffs are coming, they just don't know where they're going to land.

And then inflation seems to already be cooling due to just, you know, consumer burnout, consumer general weakness.

Some of the confidence issues that we're seeing with bar, with borrowers or with consumers, that's general, that's being driven by some of this market uncertainty.

And you know, that could be part of a self fulfilling prophecy of just, you know, the mood of the consumer tends to drive a lot of things because that's where a lot of the money comes from. Even you know, for buying goods and then unemployment. Keep watching.

That is likely to climb here in the short term between doge and just some natural slowing that we're seeing in some of those details of the unemployment reports.

And just remember that most of this is although it's painful to our 401ks and some of this volatility can cause a bit of anxiety, it's mostly rate friendly and that's why we're seeing this rally recently.

And hopefully we'll see this continue into the summer months where we see, you know, hopefully home buying pick up and therefore supply pick up a little bit and and potentially continue to see refis increase with you know, some rate term but a lot of cash out refis too, unlocking equity in homes. And there does, you know, seems to be an upside cap on rates that we've been seeing here as well.

And some of that has been mentioned on a previous podcast might just be due to the fact that yields for U.S. bonds are pretty high relative to other parts of the world.

And also, you know, you start talking about 4 and a half, 5% returns and then with mortgages closer to to 6%, 6 and a half, that's a pretty good return that you could lock in for 10 plus years. All right, good discussion, gentlemen. Talk again soon. Thank you.

Alex Hebner: 00:29:57

Thank you.

Ben Larcombe: 00:29:58

Thank you.

Jim Glennon: 00:29:59

All right, let's close this thing out. Alex, Ben, thanks so much for the wisdom. Great talking with you today. A lot of stuff to think, but that's it for today.

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