Data Calling Fed’s Confidence Into Question

As the new year began, the late 2023 assumption of multiple rate cuts from the Fed quickly gave way to the notion of needing “just a bit more confidence” that inflation was sustainably on the path to 2.0% before rate cuts could commence.  That shift in verbiage coincided with a shift in inflation numbers in January’s data.  Now that February’s inflation data is mostly in, we find inflation running nearly as hot as last month at the consumer level and even hotter at the producer level.  Today’s PPI confirmed the latter and the bond market didn’t love it.  Jobless claims added insult to injury with a big drop in continued claims and big revision (lower) to last week’s 1.9m+ reading.  All this with less than a week to go before the next Fed announcement and dot plot.

Econ Data / Events

Core MM PPI

0.3 vs 0.2 f’cast, 0.5 prev

Core YY PPI

2.0 vs 1.9 f’cast, 2.0 prev

Headline PPI MM

0.6 vs 0.3 f’cast, 0.3 prev

Retail Sales

0.6 vs 0.8 f’cast, -1.1 prev

Jobless Claims

209k vs 218k f’cast, 217k prev

Continued Claims

1811k vs 1900k f’cast, 1906k prev

Market Movement Recap

08:35 AM After the data, 10yr at 4.223% (up 3.5bps on the day). MBS down 6 ticks (.19).

09:45 AM Additional weakness.  10yr up 7.3bps at 4.261.  MBS down 10 ticks (.31).

11:57 AM More weakness.  MBS down 15 ticks (.47) and 10yr up almost 11bps at 4.294.

02:28 PM MBS are down 17 ticks (.53). 10yr yields are up 11.2bps at 4.30.

Apart from Tuesday (CPI day), today is this week’s next biggest deal in terms of scheduled economic data.  The trifecta included Jobless Claims, PPI, and Retail Sales.  Of these, Retail Sales has been the bigger market mover on average, but by a smaller margin in recent months.  Today’s example missed the consensus, but not by much.  It was also more than offset by unfriendly results in the other two reports.  Core PPI fell to 0.3 from 0.5, but that was higher than expected.  Jobless Claims didn’t help with continued claims moving well under the 1.9m ceiling and with a big downward revision to last week’s 1.906m reading (now 1.794m).  With that, we find ourselves at the end of a CPI/PPI week with yields pushing up toward 4.30% yet again.

Even though Tuesday’s consumer-oriented inflation report (CPI) had the biggest potential to cause drama for rates, it was today’s wholesale inflation report that did the most damage. The Producer Price Index (PPI) showed wholesale inflation running hotter than expected by quite a wide margin overall (0.6% month-over-month versus a median forecast of 0.3%).  Even after stripping out more volatile food and energy prices (i.e. “core” inflation), PPI was up 0.3% versus forecasts of 0.2%.   These might seem like small numbers, but keep in mind that the Fed’s inflation target is 2.0% annually at the core level.  Core readings of 0.4% in CPI and 0.3% in PPI pencil out to 4.8% and 3.6% respectively.  Inflation is the biggest concern for interest rates, so it’s no surprise to see rates moving higher.  Today’s increase brings the average to tier, conventional, 30yr fixed rate back above 7% for the first time in a week.

Fun with numbers: Did you know that, at age 22, Billie Eilish has won twice as many Oscars (2) than 80-year-old Martin Scorsese (1)? (And yes, Samuel L. Jackson, Tom Cruise, and Johnny Depp have won a cumulative total of 0.) Lenders and vendors didn’t have a lot of fun with numbers in 2023, with overall production dropping from $4.4 trillion in 2021 to $1.6 trillion last year, a drop of 63 percent in dollar volume, even more in units since average loan amounts have gone up. Yes, this is an over-simplification, but have you cut your staffing and expenses by 63 percent? (The MBA is predicting $2 trillion this year.) Lenders and vendors who want to stay in business aren’t sitting on their hands, and many are out there adding related businesses (title, insurance), avoiding overly competitive markets or low margin products, monitoring branches or LOs taking advantage of pricing concessions, engaging in aggressive cost-cutting and renegotiating contracts and compensation packages, and tweaking their business models and channels. All easier said than done. (Found here, this week’s podcast is sponsored by Lender Toolkit. With Lender Toolkit’s AI-powered AI Underwriter and Prism borrower income automation tools, you’ll be able to get loans approved in under two minutes. Hear an interview with money manager Vijay Marolia on the affordable housing shortage.) Lender and Broker Services, Products, and Software Revolution Mortgage, a nationwide lender, partners with OptiFunder for end-to-end warehouse automation. “We’ve been using OptiFunder to help us manage our warehouse allocations for years. The optimization savings, easy platform, and customer service made us instant fans of OptiFunder,” said Revolution CEO and Founder Tony Grothouse. “We have recently expanded our use of the system to automate our entire funding process. Our team leverages technologies every day to boost efficiencies in the loan process.” Founded in 2019 to bring optimization and automation to the mortgage industry, OptiFunder has automated over a half million processes for originators, including funding, wire data checks, collateral shipping, purchase advice reconciliation and writeback to the LOS, paydown requests and more. With connections to over 150 warehouse lenders and investors, OptiFunder offers the most comprehensive automation from funding through loan sale. Schedule a demo or meet with us at ICE Experience 24 to learn more about our robust automation.

The community development financial institution was the nation’s top non-qualified mortgage lender last year, according to one ranking.

Doma leadership said it has the technology and underwriting capabilities to allow the government-sponsored enterprises to handle the risk refi loans eligible for title waivers under a pilot announced by President Biden last week.

The Congressional Budget Office put an estimate on the net government subsidy provided to the Federal Home Loan Bank System, including the so-called “implied guarantee,” on bonds priced and sold to investors.

But still-elevated interest rates contributed to a “deteriorating outlook” for independent mortgage banks this year, Fitch Ratings said.

The nearly 50% homeownership rate in 2023 marked the most significant increase since the Great Recession, according to NAHREP.

Calmer Day of Losses. Data Resumes on Thursday

Without any notable econ data on tap, bonds were left to their own devices on Wednesday.  This initially involved moderate overnight weakness  and mostly sideways trading during domestic hours.  From a calendar standpoint, the 30yr bond auction was the lone tradable event.  While it helped a bit at first, bonds were soon right back where they started.  In hindsight, it was a forgettable, holding pattern type of day ahead of more relevant data on Thursday morning.

Market Movement Recap

09:50 AM Moderately weaker overnight as rate cut odds decrease.  10yr up 2.7bps at 4.178.  MBS down an eighth.

01:04 PM Stronger after 30yr bond auction.  MBS down only 3 ticks (.09) and 10yr yield up 3bps at 4.182

03:08 PM Treasuries back near weakest levels with 10yr up 3.9bps at 4.19.  MBS down an eighth.