Very Calm Reaction But Not Too Surprising

One could argue that CPI is the next biggest potential market mover after the jobs report. With that in mind, it might seem surprising that MBS are heading out the door roughly unchanged and 10yr yields are down less than 3bps. It becomes less surprising when we consider inflation was mostly in line with expectations. Elevated unrounded core numbers were offset by decent drop in supercore (services excluding energy and shelter). When it comes to this morning’s initial rally, we’d give more credit to supercore than we would to the pop in Jobless Claims, but both probably played a role. Either way, all today’s CPI really needed to do was stay out of the way of rate cut signals in the last jobs report, and it generally did.

Econ Data / Events

Continued Claims (Aug)/30

1,939K vs 1950K f’cast, 1940K prev

Continued Claims (Aug)/30

1,939K vs 1950K f’cast, 1940K prev

Jobless Claims (Sep)/06

263K vs 235K f’cast, 237K prev

Jobless Claims (Sep)/06

263K vs 235K f’cast, 237K prev

m/m CORE CPI (Aug)

0.3% vs 0.3% f’cast, 0.3% prev

m/m CORE CPI (Aug)

0.3% vs 0.3% f’cast, 0.3% prev

m/m Headline CPI (Aug)

0.4% vs 0.3% f’cast, 0.2% prev

m/m Headline CPI (Aug)

0.4% vs 0.3% f’cast, 0.2% prev

y/y CORE CPI (Aug)

3.1% vs 3.1% f’cast, 3.1% prev

y/y CORE CPI (Aug)

3.1% vs 3.1% f’cast, 3.1% prev

y/y Headline CPI (Aug)

2.9% vs 2.9% f’cast, 2.7% prev

y/y Headline CPI (Aug)

2.9% vs 2.9% f’cast, 2.7% prev

Market Movement Recap

08:46 AM Initially stronger after data, but pulling back a bit.  MBS roughly unchanged and 10yr down 1.7bps at 4.032

02:03 PM Holding modest gains.  MBS up 2 ticks (.06) and 10yr down 3.2bps at 4.017

04:05 PM Fairly flat, but near weaker levels of the past few hours. MBS up only 1 tick (.03) and 10yr down 2.9bps at 4.02

“All I know is what I read in the papers,” Will Rogers quipped. In news in the papers from our Census Bureau, AI use at large companies is in decline. “A dip in corporate AI adoption isn’t a great sign for an industry hellbent on world domination.” I am good at misunderestimating things, but will it go the way of blockchain (which is alive and simmering, but just not on the “front burner”)? This is a weak segue, but speaking of simmering, did you know that ChatGPT consumes an inordinately large amount of the world’s water supply? I wouldn’t say that AI or ChatGPT are fads, but I received this note: “We have experimented with corporate branding, management, mission statements, team building, you name it. None have really worked. The nice thing about markets like this is that they force you to face the fact that there are only a few things that actually work: expense cutting and extremely aggressive sales and marketing. And once you figure that out, you no longer fear markets like this.” (Today’s podcast can be found here and this week’s are sponsored by Indecomm. Streamlining operations with the genius blend of automation, AI, and services. Achieve practical digital transformation and real operational impact with Indecomm’s purpose-built mortgage solutions. Hear an interview with Outamation’s Sapan Bafna on how companies can streamline FHA modification workflows and eliminate compliance risks.) Services, Software, and Tools for Lenders and Brokers

It’s an interesting morning for economic data and the bond market’s reaction.  At face value, CPI was mostly in line with forecasts, but unrounded numbers were a bit hot (i.e. core monthly CPI was 0.346%, almost high enough to make for a 0.4 vs 0.3 reading). Additionally, monthly headline inflation was 0.4 vs 0.3. These numbers, in and of themselves, wouldn’t seem to suggest a bond rally.  At the same moment, Jobless Claims printed at 263k vs a 235k forecast–the highest reading since 2021. The initial conclusion is that there is enough labor market concern to offset still-elevated inflation, but a drop in supercore inflation (excludes food/energy/housing) may be the bigger factor.  Last month’s supercore, per Bloomberg, was 0.481.  This month, it fell to 0.330. This basically means inflation is standing aside and allowing the Fed to focus on the weaker labor market–a conclusion that’s far more informed by the last jobs report than today’s jobless claims.

Fairway Home Mortgage wants to give its loan officers tools to analyze data in order to spend more time helping their customers than going through paperwork.

Falling interest rates led to a rush in refinancing, but slowing purchase activity brought a decline in overall lock volumes, according to Optimal Blue.

Consumers are more interested in reporting rental pays to the credit bureaus as landlords become less involved, according to TransUnion.

Intent typically plays a key role in whether or not allegations that a borrower misrepresented a property’s status can be proved, mortgage industry experts say.

Treasuries rose, led by short-dated notes, after a reading on wholesale inflation came in weaker than expected, cementing bets that the Federal Reserve will start to cut interest rates next week.

Wednesday brought the first of this week’s two key inflation reports. While the Producer Price Index (PPI) is the lesser of the two in terms of potential impact on rates, it came in far enough below expectations to make for a measurable improvement. The catch is that the improvement in question pertains to the underlying bond market. Before the data, bonds were slightly weaker, thus suggesting slightly higher rates.  But lenders don’t release their rates for the day until a few hours of trading have commenced.  This leaves time for markets to react to early AM data such as today’s PPI. Bottom line, PPI helped bonds which, in turn, helped rates hold steady as opposed to drift a bit higher. 

Helpful Data and Treasury Auction Set High Bar For CPI

Another fairly straightforward day for the bond market with friendly econ data and a strong 10yr Treasury auction both helping push yields lower. If it seems like the size of the miss in the PPI data justified a bigger move, consider the fact that it’s an incredibly volatile data series. Additionally, last month’s PPI created “base effect” issues (i.e. it was so high that today’s -0.1% reading leaves the 2 month annualized level at 3.6%–still too high. Nonetheless, it was good enough news for bonds to push back against overnight weakness.  The afternoon’s 10yr auction helped bring yields to new lows for the day before ebbing slightly higher in the afternoon. Thursday AM’s CPI release is this week’s big to-do from a potential volatility standpoint.

Econ Data / Events

Core Producer Prices MM (Aug)

-0.1% vs 0.3% f’cast, 0.9% prev

Core Producer Prices YY (Aug)

2.8% vs 3.5% f’cast, 3.7% prev

Producer Prices (Aug)

-0.1% vs 0.3% f’cast, 0.9% prev

Market Movement Recap

09:24 AM Stronger after PPI data.  MBS up roughly 1/8th and 10yr down 2.8bps at 4.055

11:59 AM Best levels.  MBS up 5 ticks (.16) and 10yr down 3.7bps at 4.046

01:05 PM Strong 10yr auction prompts just a bit more buying in TSYs.  10yr now down 5.7bps at 4.026.  MBS still up 5 ticks in 5.5 coupons, but almost 3/8ths in 5.0 coupons. 

04:13 PM MBS now up 3 ticks (.09) in 5.5 coupons and 6 ticks (.19) in 5.0 coupons.  Both are down about an eighth from highs.  10yr down 3.8bps at 4.046