Paradoxical Rally Gets Logical After Retail Sales

If yesterday’s PPI-driven rally was a paradox, today’s continuation was quite the opposite.  While it’s not the most reliable market mover among economic reports, Retail Sales can occasionally go big. Today was such an example. Including or excluding the auto sector, sales dropped at the fastest pace in just over year and missed forecasts by the widest margin in several years. That provided a clear mandate for bond traders to press the happy button, ultimately ushering yields to the lowest levels of the week.

Econ Data / Events

Retail Sales

-0.4 vs 0.3 f’cast, 0.4 prev

Retail Sales excluding autos

-0.4 vs 0.3 f’cast, 0.7 prev

Import Prices

0.3 vs 0.4 f’cast, 0.2 prev

Industrial Production

0.5 vs 0.3 f’cast, 1.0 prev

Market Movement Recap

09:15 AM Roughly unchanged overnight and sharply stronger after retail sales data.  MBS up 10 ticks (.31) and 10yr down 6.7bps at 4.465

01:40 PM Still mostly holding morning rally.  MBS still up .31.  10yr down 5.9bps at 4.472

05:10 PM Sideways into the close with MBS only 1 tick (.03) lower than last time.  10yr yields ended down 5.6bps at 4.476

As rumors of the demise of HMDA reporting swirl, as well as a 50 percent reduction in HUD headcount and actual VA cuts, think about this the next time you go into a grocery store: It’s not like lending is like buying organic meat or produce. More than in most retail transactions, the organic consumer is buying both a thing and an assurance about a thing, and stores shouldn’t misrepresent something. The consumer may be ill-prepared to deal with that. I mention this because a certain segment of the population would prefer that the CFPB vanish. (Elon Musk has his own “connection” with the CFPB: it has a database containing hundreds of complaints about his car company, Tesla, and it regulates digital payment platforms, something Musk is developing at X.) Others are quick to say, “Better the devil you know than the devil you don’t” and remind us that plenty of states will step in. For example, in California, thank you to Scott S. who reminds me that misrepresenting occupancy can be a felony! California’s AB 3108 makes it felony mortgage fraud for a “mortgage broker or person who originates a loan” to intentionally “instruct or otherwise deliberately cause a borrower to sign documents reflecting the terms of a business, commercial, or agricultural loan, with knowledge that the borrower intends to use the loan proceeds primarily for personal, family, or household use” or “instruct or otherwise deliberately causes a borrower to sign documents reflecting the terms of a bridge loan, with knowledge that the loan proceeds will be not used to acquire or construct a new dwelling.” (Today’s podcast can be found here and this week’s is sponsored by CoreLogic. Originators who leverage their Marketing Solutions as part of their customer retention practices have seen their pipelines increase by up to 4 times when compared to traditional lead generation methods. Hear an interview with Verisk’s Kingsley Greenland on how the Los Angeles fires and flooding in North Carolina are altering catastrophe models used for insurance pricing.)

What a difference the past two mornings have made for a bond market that was seemingly on the ropes on Wednesday. After yesterday’s paradoxical (though, ultimately rational) rally in response to the PPI data, today’s morning momentum came down to the Retail Sales report. Bonds were flat heading into the data, so it’s not hard to imagine that things could have gone either way. As it happened, the data was exceptionally weak, and bonds have moved to the best levels of the week in response.

A $1 billion assessment announced Tuesday for California’s FAIR Plan, the state-mandated insurer of last resort, is expected to drive up premiums as companies will likely pass some of the costs onto homeowners.

North American banks face heightened anti-money laundering scrutiny and a few related variables will determine whether or not this leads to more mortgage sales.

Southeast homeowners affected by the storms last fall submitted a combined over 78,500 flood insurance claims to the National Flood Insurance Program.

If the government were to end the Fannie Mae and Freddie Mac conservatorships, the new status could constrain CRT deal ratings, as they are counterparties.

While Freddie Mac’s weekly survey showed 30-year rates falling, other indicators paint a mixed picture for mortgage lenders and borrowers.

What’s Up With Today’s Paradoxical Bond Rally?

PPI may not be as heavy a hitter as CPI on average, but one could make a case for this week being one of the rare exceptions. Strikingly, PPI managed to HELP bonds despite the core annual number coming in much higher than expected. The catch is that January’s numbers were in line with expectations.  More importantly, the components of the PPI data that flow through to PCE inflation suggested bigger drop than expected when we get that data in 2 weeks (core PCE now seen around 0.25% for January as opposed to 0.35% before PPI). Today’s rally didn’t play out all at once like yesterday’s sell-off.  It gathered momentum heading into and out of the conclusion of this week’s Treasury auction cycle.  Nonetheless, PPI deserves most–if not all–of the credit for turning the tide. 

Econ Data / Events

Core Producer Prices, M/M

0.3 vs 0.3 f’cast
last month revised up to 0.4 from 0.0

Core Annual Producer Prices

3.6 vs 3.6 f’cast, 3.5 prev

Market Movement Recap

09:09 AM Modestly stronger overnight and gaining more ground after AM econ data.  MBS up 6 ticks (.19) and 10yr down 5.8 bps at 4.567

12:54 PM Additional gains into the 30yr bond auction time frame.  MBS up 3/8ths in 5.5 coupons and 10yr down 9.2bps at 4.533

03:09 PM More gains into 3pm, but bouncing a bit since then.  MBS up 13 ticks (.41)

This morning’s econ data included weekly jobless claims, which came in roughly in line with forecasts, and the Producer Price Index (PPI) which was a bit different.  The month over month change in core PPI was as expected, but the annual change jumped 0.3 above expectations (3.6 vs 3.3).  How can that be?  Revisions to the past 4 months affect the annual number without necessarily impacting the monthly number. In this case, both December and October were revised 0.1 higher, thus accounting for the 0.2 increase from last month’s 3.5% core annual PPI. 

Meanwhile, the monthly change in January was not only on target, but also good news for the components that flow through to PCE inflation (which the Fed watches more closely).

Jobless Claims were a non-event, but at least not showing additional labor market tightening.

The net effect in bonds is a relative sigh of relief after yesterday’s high alert following CPI.