Fed Announcements and Trade Deals: Seeking Clarity in Economic Uncertainty | May 12, 2025

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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 your profitability this week.

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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. Welcome, everybody. Today is Monday, May 12th. Thanks for being here. A lot going on.

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You may have already seen the news this morning. We'll talk a lot about our kind of surprise agreement with China on tariffs here in a little bit when we get into our main segment, which is going to be heavily bad tariffs, just generally what's going on in the market. In the interest of keeping you informed, we're always striving to bring you up to the hour current events and we'll have a ton of that here today. Whether you're an originator, a hedger, capital markets people, block desk operations, just stay tuned and we'll let you know what you need to be thinking about.

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Great show today. Again, we'll do that market update. We've got James Cahill from our desk, another great economic and markets expert from our team. He'll join us today to talk through the market update and likely will join us again at times in the future. Before we get into that, a little bit of data. OBMMI is just stubbornly stuck between six and a half and seven. We're right about six and three quarters today on the conventional 30-year fixed, but volume is still pretty good.

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I think you read articles about the spring selling season and buying season is still kind of a dud. That may be generally true. We've talked a little bit about how some of those numbers can be skewed a little bit by things like ghost inventory. But generally speaking, we're seeing good lock volume. So there does seem to be some volume coming in and it's not all purchase, right? We are continuing to see the refi indexes tick up as folks are sort of forced to refinance for whatever reason. A lot of it is cash out.

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some of it just to get the payoff, a higher balance, know, credit cards, loans, things like that. And, we've talked in the past with some of our guests about how we may be in one of the best refi markets we've ever seen. We just don't know it yet. So continuing to keep an eye on that. Other than that, again, volume is pretty healthy. We're over a hundred percent of what we would consider normal pre-COVID levels. So feeling good about that this week as we go into New York, a lot of you will be there. Definitely hope to see you.

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in New York at the MBA secondary conference next week. So we'll be recording this podcast this Friday ahead of that. All right, let's get right into it. Let's move over, talk a little bit about market conditions. Okay. Welcome, James, Jeff. Welcome to the show. Let's wrap a little bit. There's definitely a lot going on. We'll get to this morning's announcement here in a second, how that plays into all these different topics. But let's start out with the Fed.

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Big Fed meeting last week, James. Typical Wednesday announcement. Nothing super surprising, but still some acknowledgement of some of the tariff discussions that are going on and what effect those might have on the economy. What are the highlights, do you think, from the Fed announcement last Wednesday? Yeah. I think April was a month that's going to go down in market history. It was definitely an interesting one. If you were checking out the CME kind of day-to-day as I was,

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You'll know that at one point it was almost a 50-50 as to whether or not there would be a rate cut. But ultimately, as we got to end of the month, it became very clear that the Fed was going to maintain the policy rate as it is, a four and a quarter to four and a half. If you're looking forward to June, it shows about 90 % today implied that there will not be a rate cut. If that holds, then we'll only have four Fed meetings left, which makes it increasingly unlikely that we're going to see four cuts this year. Three is roughly priced in right now, but

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that could still change. Three seems super aggressive to be very aggressive at this point with kind of the trends we're seeing. mean, to your point, James, I think you had noted earlier that, you know, only a 10 % chance of it or people pricing in only a 10 % chance of a rate cut in June. That's down significantly from a month ago. Most people were assuming there'd be a rate cut by June, not seeing that anymore. Unless we do see a significant drop in jobs.

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dropping growth. I don't know. I just don't see three rate cuts out there this year. No, it feels like, 10 % is basically nothing. That's like the long shot bet. Somebody's got money on it just in case things do deteriorate and they make 10 to one on that. But it seems increasingly less likely that, I don't know, maybe we don't see any cuts this year. It's all like the data really has to dictate that. we're getting close to halfway through the year and the data is as strong as it's been, as strong as it's ever been.

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Yeah, it's definitely a bit of a long shot. Four seems impossible at this point. Three seems unlikely, but that's roughly what they have priced in. But I think what really the Fed's speech that Powell gave kind of shed some light on what they're thinking more. When he came out, he had two main points he wanted to address. The first was that the American economy is actually in a pretty good shape. We're facing 4.2 % unemployment and 2.4 % inflation.

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Both of those are above the goal, but they're far from disruptive figures, something to really jump on. So the Fed was trying to show that they're holding steady and that the US economy has a lot that it can absorb. The second item that Powell wanted to highlight though, was that tariffs will be inflationary. There's a question around how big of an impact that's going to be and whether it's a one-time shock or more of a continuous trend. It's really impacted by how quickly

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America can absorb that shock. So the idea of the message was really to show America is in a good strong spot, but that there is some inflation coming. It's very kind of uncertain. I mean, the Fed's taking a very academic view of this. They're just doing the math, right? Tariffs are going to increase the price of imports. We rely on imports heavily for consumer spending. Consumers will spend more on said product by X number of dollars and that's going to push up inflation.

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But again, it's academic, right? So the inflation numbers themselves, but there's so much that goes into those and so many different products. And some of them are already domestic and some of them have been inflated for years. I don't know. It's still, it's not one-to-one in my head that there's going to be something either in the middle or hopefully even on the downside. Jeff's brought this up before that there may even could be some deflationary effects of this because people buy less goods and then it kind of spirals from there, right?

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I guess we will find out. think it's, I don't know, there's still, so let's just get into what happened this morning, right? So we saw an announcement that we, kind of a surprise, we weren't expecting it right away, but we have made a deal with China, at least for 90 days, where there's now essentially, effectively a 30 % tariff on goods coming from China. Besant would say that that's the first in many steps to decoupling from China is the way I was reading that.

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just trying to make us less reliant on one another for trade. Is that kind of how you're reading it? Yes. It's definitely a significant step. Going into this on Friday, as Bessette left to Switzerland to go do the negotiations, we were at 145 % tariffs on China. The first boats were actually unloading in the Port of San Francisco, receiving those tariffs. Donald Trump had previously said he was not going to budge on that number.

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But by Friday that he was saying, if China played a little ball, if we were working together, he might lower them to 80 % come Monday. it's actually, it's a 10 % base and an extra 20 for the tariff imposed due to fentanyl and other security restrictions. So it is a large change in the policy and the market has very much reacted. Everything is a good step. We know and wants to be in this trade war. want to be working towards.

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a more open market, but these are all positive steps so far. Whether or not they result in anything in 90 days, that's still really to be seen. But as they were saying, perhaps even 90 days comes and we don't have a full deal, it seems very likely now that they would be willing to kick out another 90 days or so. Just keep pushing out until we come to more of a conclusion. Yeah, it feels foregone.

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debt ceiling discussions, right? It'll get figured out or it'll get kicked back down the road and we will make it work. Maybe that fentanyl piece is the negotiating tool that could get back down to 10 % if something's done about the ongoing scourge that is fentanyl coming into the US, allegedly from China. Yeah, and guess we've made other deals. I mean, the China thing is now the top headline, but we made a deal with, I believe, the UK just a few days before that.

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We're still talking with Europe. What is even going on with Canada and Mexico? That's still kind of open season, right? Those are our two biggest trading partners. Definitely. And just to bring it back to the Fed for a second, something that they kind of continuously echoed on and I think you would have heard through all of April Bay so far is the word clarity. If you listen to CNBC or Bloomberg or Optimal Insights, there's been a lot of, we're waiting for clarity. The Fed very much said that they were still waiting for clarity. There's movement.

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in progress on China, but we are very much still in the storm of this. We have not seen resolutions. There's a UK deal that came out on Thursday of last week and it's lowering tariffs on UK autos. It's lowering tariffs on American agriculture, but it is not a formal trade deal. It is a little bit more of a handshake and it's not incredibly deep, but

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As with this 90-day pause on China, anything that we're working towards is positive. That had to be why they announced it, right? They just had to give some positive news out there. It goes back to the point. There's no way we can get too much meaningfully done in 90 days, which means it's going to have to get pushed out. I would say the China announcement is significant, but if the rest of the announcements are going to be like the UK announcement, these are kind of nothing burgers, if you will.

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We'll probably see a few more of these types of announcements, but they're not going to move the needle significantly in terms of actual substance. That UK announcement, there just wasn't much to it, but it felt like they just had to announce something. They agreed to make an agreement. It's so complicated to get there. There's so many carve-outs and caveats and what about me? What about those parts that cross the border three times? So much complication, guess. Yeah, these little incremental.

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handshakes make a difference and it gives them 90 more days to actually do all the math and fill out all the paperwork to get to something or to push it down another three months. to an agreement to make an agreement, part of it was we got a security agreement with the UK who is of course a NATO member. So we actually already have a very strong security agreement with them. So how much progress that part of the deal is a little smaller. Sure. Yeah. Our oldest and dearest friends.

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Yeah, there's no news in that again, that is a nothing burger that we've got a security agreement with the UK. One other thing coming out of the UK announcement, I feel like it's turned people's attention back to the UK and definitely been some interesting comparisons to is this our Brexit? I mean, you saw that somewhat over the past month or two, but I feel like I've seen a few more articles out there over the past few days, which is...

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most people would agree, not good. don't think anybody thinks Brexit turned out very well for the UK economy overall. you know, seeing a lot of those comparisons in terms of us isolating ourselves, just like, you know, the UK did with Brexit, obviously. And so what are the long-term effects of that? you know, UK's growth has been stymied over the past eight years, eight or nine years. That's just a little scary to think about it in those terms.

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about where we will be eight or nine years from now if it does look similar to Brexit. Right. Just aggressively reversing globalization of the biggest economy on the planet. What does that mean for growth? Can we sustain anything close to what we've driven the last 20 years if you take away the great financial crisis just on our own internally, mostly with significantly reduced trade with other countries? Quickly tying this all back to rates.

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You know, obviously we've seen a flight to risk this morning and increase in equities. means we have what 10 years up the basis points this morning. So we'll probably see an increase in rates. Jim, you mentioned we, know, OBMMI has been right around 6.75 for over a month at this point. So we'll probably push up towards seven. So that's obviously not great news for our industry in particular, but.

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know, overall markets obviously like the news this morning, but going to put some pressure on rates. Yeah. Huge rally in equities. If you've all been watching today, I imagine by the time this comes out, we'll still be up 2%, 2 plus percent on the S and P. It continues to kind of shoots down one narrative we've talked about on this podcast quite a bit, which is that the White House was taking a relatively cavalier view of all of this and they were more okay with the markets suffering.

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and the economy suffering and potentially getting into a situation where the Fed was forced to act because that weakness was started to make its way into the jobs market. But based on the news, the past few days, especially the news this morning, it does feel like the White House would prefer that the perception be pretty positive and optimistic about how all of this plays out and that we may not completely isolate ourselves, that we may make some relatively reasonable deals with these countries after announcing.

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you know, 60, 70 plus percent tariffs just a month ago on quote liberation day. But you do wonder tying it back to one of your theses over the past couple of months and Trump's desire to bring down rates. Obviously that has not happened yet for some of the reasons we outlined, right? The economy is still strong. Rate watch futures don't see rates decreasing anytime, at least in the near future. So what other tools does

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Trump have to try to decrease rates in the short term. Right. Yeah. Seeing nearly no movement there, and there may even be a little bit of an impact of folks might be a little bit squeamish about buying treasuries because there's been threats of nations or even funds dumping treasuries on the market, either in retaliation or in fear of tariffs. Right? So that's continuing to keep rates high. It's difficult to think of anything other than the Fed acting.

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or some sort of near cataclysmic dislocation in the financial markets that could also cause the Fed to act. It's difficult to think of other scenarios where rates drop by any significant amount and that strangely with all this volatility, most of the projections for mortgage rates before the tariffs discussion happened and now.

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d a half and seven going into: 2027

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Yeah, right now I'm taking the over on most rate predictions. Taking the over. you think we're, I think maybe the seven handle comes back or you think that's more just maybe six and seven eighths? Yeah, I think seven handle could come back. Yeah. All right. Yeah. Not, not what we'd love to hear in the mortgage industry, but I think we also, we have to continue wrapping our minds around the fact that we needed a little bit of a reset in this.

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industry and it's been slowly happening over the past few years. I think we're just in a rate environment that's probably more natural than what we've seen maybe since the great financial crisis and sixes and sevens, maybe that spot. But even with rates being at those levels, there still is a lot of activity in home sales. still growing activity in refis and we still would expect, and the NBA is still projecting a 16 % increase in volume this year over last year, which is

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've all been hoping for since: 2022

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PPI. So these are definitely the big inflation reports that you want to keep your eyes on. We should probably by now be seeing the tariff impact. So these are definitely ones to pay attention to. Though with the new news in China, we might see some reversal come next month. I thought one of the really interesting ones to check out is on Friday. There's the import price index. This is just a basket of goods that are imported the United States every month and how they have changed in price.

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This would have been calculated this week. The first boats coming off with the 145 % tariff will be included. So we should see a large rise, but it's just an interesting one to check. How much is that actually going to be passed on to the import tariff? Right. Yeah. I think there will be asterisks on all these inflation numbers here going into the next

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quarter or two because of all the things you just said. I'm even curious now, thinking CPI, PPI, we've talked about how they're very much related and correlated, but there's a gap between them and that gap would be profit margin being built in by the companies that sell goods. So I wonder if we see any sort of dynamic where PPI remains fairly flat because there's maybe a little bit of a blip because of the few boats that came in at 140 % tariffs. But then

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There has been talk of producers increasing their retail prices in anticipation, raising their margins in anticipation of tariffs and having to counterbalance some of those effects. I wonder if we see CPI jump more than PPI in the short term, just to reflect that margin differential, just like we would do in the mortgage industry, raise margins a little bit in the volatile market. For a producer, super volatile market. I don't know what my goods are going to cost next month, so I may have to increase what I'm charging for my product to-

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to weather that storm, right? When it comes. Anything else of note coming up later this week, James? Nothing else of strong note there. I had a good little fun fact I picked up this week. Do it. Jim, do you have any idea what country has the most Bloomberg terminals per person? Per person? Per person. Yeah, capita Bloomberg terminals. I'm going to guess it's not the US or this wouldn't be a tricky question.

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Oh man, it's going to be some small related to some recent news or maybe not related, but it's been come up in the news recently. Definitely. And it is small.

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It's not Hong Kong or something like that, is it? It's actually the Vatican. The Vatican has 17 Bloomberg terminals and roughly 900 people. So about 2 % of people in the Vatican have access to a terminal, which is just an interesting stat in relation to our first American pope. It's exciting for us. That's a good indicator. That is an interesting stat. What are they watching, do you reckon? What are they using their terminals for over there? Do they say? It's for currency.

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because the church is so international and they have parishes every country on the planet. Sure. They're doing a little hedging too, a little currency hedging. That is an interesting factoid. Nice one. What does the Vatican's mortgage-backed security portfolio look like, I wonder? I'm sure they're diversified. There's no better high-yielding asset that you can find right now, I don't think. I don't know that I'd be trusting corporate bonds in this environment.

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All right, James, Jeff, thank you for the time and the discussion. Good stuff. Thank you for having us. All right. Let's wrap this thing up. Thanks again to James and Jeff for the discussion today. A lot to think about, a lot to keep an eye on this week. And again, we'll record another one of these on Friday, do a couple more updates on tariffs and what to watch out for in the coming week and hopefully see a ton of you at the MBA secondary in New York next week. That is coming up here.

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Very quickly, big industry conference. see you there. And that's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Don't forget to follow us on LinkedIn for more updates and to access our latest video episodes. You can also find each episode on all major podcast platforms. Thank you for tuning in to Optimal Insights.