CPI Helped Bonds Avoid Losing Ground

Bonds began the day in slightly weaker territory and managed to flip into slightly stronger territory after the CPI data. Core monthly CPI printed at 0.2, but was rounded down from 0.24. In other words, it wasn’t as big of a beat as the “0.2 vs 0.3” result suggested. The notion of inflation being “lower but still elevated” contributed to the tepid response. As for MBS, they were in positive territory all day even though charts made them look weaker due to monthly settlement.  Wednesday morning brings November’s retail sales data and Producer Price Index (PPI). Neither are as heavy hitting as CPI, but they could move the needle of they fall far from forecast. 

Econ Data / Events

m/m CORE CPI (Dec)

0.2% vs 0.3% f’cast, — prev

m/m Headline CPI (Dec)

0.3% vs 0.3% f’cast, — prev

y/y CORE CPI (Dec)

2.6% vs 2.7% f’cast, 2.6% prev

y/y Headline CPI (Dec)

2.7% vs 2.7% f’cast, 2.7% prev

Market Movement Recap

08:32 AM Stronger after CPI data. MBS up just over a quarter point and 10yr down 1.6bps at 4.16

10:50 AM Choppy after initial rally but still slightly stronger.  MBS up 5 ticks (.16) and 10yr down half a bp at 4.173

01:15 PM 30yr auction 4.825 vs 4.833 f’cast. Bid to cover 2.42 vs 2.38 avg.  No major reaction.  10yr down 1.1bps at 4.167 and MBS off weakest levels, up 5 ticks (.16) on the day.

04:37 PM 10yr yields down 0.3bps at 4.175 and MBS up 5 ticks (.16).

According to our chart of MND’s mortgage rate index, 30yr fixed rates bottomed at 6.01% yesterday, but that’s because the chart logs the day’s latest entry.  On Friday, until late in the day, the chart showed a rate of 5.99%. It was only after several lenders raised rates in the afternoon that the index moved up to 6.06%. Today’s rates ended up just a hair higher than that at 6.07%. Most of the underlying market weakness that accounts for today’s jump occurred yesterday afternoon. Lenders who raised rates yesterday afternoon offered roughly comparable rates this morning.  Things might have ended up worse today had it not been for a reasonably well-received CPI report (Consumer Price Index). This important data showed inflation remaining in check in December, with the most closely-watched metrics coming in just below the median forecast.  Lower inflation is good for rates, all else equal, but inflation isn’t falling fast enough to have a big impact in the short term. In today’s case, it did more to help the bond market avoid losing ground than it did to spark a new rally. [thirtyyearmortgagerates]

Today’s Capital Markets Wrap (3PM ET) will cover how mortgage rates may be impacted by the lack of a traditional flight to quality despite rising international unrest, alongside proposed limits on institutional SFR purchases, rate sheet changes, recent presidential commentary on GSE bond buying, and… the proposed credit card interest cap. “Rob, yesterday’s Commentary had a piece on President Trump’s proposal to cap credit card interest rates at 10 percent. Will it impact lenders?” One quick thought is, “If mortgagees are relying on borrowers refinancing their 25 percent credit card debt using home equity, but a person can obtain a 10 percent credit card online and quickly with no ‘hoops’ to jump through, some percentage will do that and not refinance their home using a mortgagee.” Another thought is, “Why stop at setting credit card interest rates? Could the president decide he’s going to set mortgage rate ranges, independent of credit risk, LTV, or default statistics?” Americans now carry a record $1.21 trillion in credit card debt. A new “White Paper reveals how persistent financial pressures are pushing households to rely more heavily on credit cards for everyday expenses, with the average user carrying a $5,595 balance: “Managing High-Interest Debt: How Cash-Out Refinances Can Help Homeowners Find Relief.” (Today’s podcast can be found here and this week’s are sponsored by Figure. Take advantage of Figure’s technology and products like its fixed HELOC, DSCR loan, piggyback loan, and direct debt paydown, helping you serve more of your existing network and expand into new markets. Hear an interview with Clever’s Jaime Seale on the widespread financial barriers and affordability concerns of younger generations, and why Millennials, in particular, are willing to stretch budgets significantly despite planning to purchase homes below current median prices.)

CPI came out just a bit lower than expected with the monthly core at 0.2 vs 0.3 and annual core at 2.6 vs 2.7.  The unrounded numbers were closer to forecasts and headline inflation was unchanged from last month. All that to say that there was no major directional suggestion for rates in today’s data. It’s best use is to confirm that inflation is roughly where we left it before data collection got wonky surrounding the shutdown.  Bonds are definitely stronger than they were before the data, but the gains have been choppy and fairly small so far. 

A new move that would open up more use of certain dedicated savings accounts for home purchase purposes is under consideration, according to Politico.

Nearly half of all credit card users carry a balance, according to Academy Bank. Higher non-mortgage debt levels can affect home loan underwriting.

The survey, taken before Pres. Trump’s $200 billion MBS buy demand, finds panelists worried over inflation, but also see employment as the larger downside risk.

But a senior administration official said the DOJ, not Pulte, is behind the subpoena that relates to Powell’s congressional testimony about Fed building renovations.

Federal Reserve Chair Jerome Powell said the central bank has been served grand jury subpoenas and been threatened with criminal indictment, moves he called “pretexts” to influence interest rates through “political pressure or intimidation.”

Incidental Weakness Ahead of CPI Data

Bonds were marginally weaker on Monday with no obvious scapegoats in sight. Some reporters pointed toward Fed Chair Powell’s criminal inquiry as rattling the market, but bonds were effectively unchanged in the 1pm hour after a well-received 10yr Treasury auction.  More importantly, there was no clear correlation between the overnight news and the overnight market movement. Volume was the lowest in several days–typical for a data-free Monday. MBS underperformed, but only because they’re still range-finding after last week’s massive outperformance. Tomorrow morning’s trading deserves much more focus than anything seen today. CPI will be out at 8:30am ET and it is expected to be a more tradeable installment of the data compared to the last release (which proved to be questionable due to data collection constraints surrounding the shutdown/reopening timeline).

Market Movement Recap

08:54 AM Moderately weaker overnight but holding inside the range. 10yr up 1.9bps at 4.19. MBS down an eighth of a point.

11:56 AM No reaction to 3yr Treasury auction.  10yr up less than 1bp at 4.18 and MBS down just over an eighth of a point.

02:49 PM MBS down 9 ticks (.28) and 10yr up 1.5bps at 4.186