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.

Capital markets participants around the world breathed a sigh of relief when Federal Reserve Chair Jerome Powell said Wednesday that President Donald Trump’s calls for lower interest rates won’t lead the central bank to change its rate decisions. “People can be confident that we’ll continue to keep our heads down, do our work, and make our decisions based on what’s happening in the economy.” In addition, lenders and investors took note of him saying, “There are going to be regions of the country where you can’t get a mortgage.” “Rob, I realize that insurance is regulated at the state level, not the federal level. Are you hearing anything about an arrangement, like mortgages, where insurance companies have a certain dollar exposure to properties, but past that, the Federal government steps in to cover homeowner losses?” Yes, there is some chatter about that, especially if the federal government has some concessions from the insurance companies not to exit certain states. The devil’s in the details, but storm severity and monetary losses are not lessening. Homeowner’s insurance issues are not just a California problem, or a Florida problem. (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 Accunet’s David Wickert on taking over the family business from his father.)

Federal Reserve Chair Jerome Powell said insurance companies and banks are already pulling out of disaster-prone areas, which could pose problems.

The White House has tapped former Federal Deposit Insurance Corp. Director Jonathan McKernan to lead the Consumer Financial Protection Bureau and attorney Jonathan Gould to lead the Office of the Comptroller of the Currency late Tuesday.

The latest refinance surge helped lift total application activity up for a second straight week, even as purchases fell, the Mortgage Bankers Association said.

The company more than doubled results over comparable periods and exceeded estimates due to stronger economies of scale and valuation adjustments in its favor.

The Federal Reserve is set to refrain from cutting interest rates for “quite a while,” following a hotter-than-expected inflation report, according to Mohamed El-Erian.

CPI Came in HOT and Bonds Reacted Logically

There’s remarkably little else to observe beyond this morning’s initial commentary.  Bonds did exactly what we would have expected based on the sharply higher inflation reading with 10yr yields popping about 10bps higher and MBS shedding 3/8ths of a point, if there’s any new news, it’s simply that bonds managed to avoid any major additional selling pressure after the initial push in the first 2 hours of trading. Yields are closing out the day right in line with the levels seen 10 minutes after CPI came out.

Econ Data / Events

Core Monthly CPI

0.4 vs 0.3 f’cast, 0.2 prev
unrounded, 0.446

Core annual CPI

3.3 vs 3.1 f’cast, 3.2 prev

Market Movement Recap

08:38 AM Obliterated after CPI.  MBS down almost half a point and 10yr up 11bps at 4.639

01:05 PM modest recovery heading into 10yr auction, but losing some ground afterward.  10yr up 11.1bps at 4.638.  MBS down just over 3/8ths. 

02:52 PM Still relatively flat after initial selling.  10yr up 10.7bps at 4.635.  MBS down just over 3/8ths

We know that bonds take a majority of their economic data cues from two reports: NFP and CPI. We knew that today’s CPI was critically important in commenting on the potential “pause” of inflation’s descent back toward target levels. We also suspected, for a variety of reasons, that CPI could be an even bigger market mover than the jobs report. Unfortunately, it was.
Economists expected month over month core inflation to come in at 0.3%.  As it happened, it nearly came in at 0.5% (the unrounded number was 0.446%).  Used autos, housing, and medical services all played large roles in the surprise. The results keep the annual rate of change stalled out above 3%.

The bond market response was obvious, to say the least. 

Lastly, on the topic of CPI vs the jobs report, the torch has indeed been passed, although either report could cause a bigger reaction than the other if it were far enough from forecast.  That just happened to be CPI this time.

With the whirlwind of Trump Administration news (Jonathan McKernan to lead the CFPB, playing hardball in Gaza, ending penny production, pardoning former Illinois Gov. Rod Blagojevich, freeing Mark Fogel, firing the head of government ethics, beginning the gargantuan task of cutting government spending, trying to rename of the Gulf of Mexico, ramping up deportations, to name a few), it is good to keep an eye on residential lending. I received this note. “Rob, stick to mortgages and keep politics and regulatory changes out of your Commentary.” Unfortunately, they are all intertwined, and lenders are keenly aware of what helps or hurts borrowers. (The MBA has assured us that the CFPB’s APOR will be released Thursday.) For example, the new HUD Secretary Scott Turner says he plans to quickly launch a review to root out inefficiencies at the agency, and that Fannie & Freddie privatization, cost-cutting, and a new name are his priorities. For lenders, especially independent mortgage bankers attending the TMBA conference, current topics include the Community Reinvestment Act for IMBs, restrictions on foreign ownership of U.S. soil, state adoption of the CSBS model capital, liquidity, and governance framework, and watching to see how the state by state impact of the NAR settlement plays out. (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 Mortgage Advisory Partners’ Brian Hale on the recapitalization of Fannie and Freddie.)