Bonds Reacting to Data. Is It Justified?

Retail Sales came out at 0.6 vs a median forecast of 0.4 and rates moved higher as a result.  Is the reaction justified?  In a word: yes.  There is no distortion from the fact that this is December’s data because this report is seasonally adjusted.  How about the fact that everything costs more, so of course Retail Sales will be higher?  That’s true, actually.  Inflation also inflates this data series, but inflation was 0.3% last month, which is only half the Retail Sales result.  More importantly, the economists doing the forecasting know all this stuff, so even if both of these aspects led to heavy distortions, a beat is still a beat when it comes to the bond market’s reaction.  10yr yields ended the day 5bps higher at 4.106 and MBS lost nearly 3/8ths of a point.

Econ Data / Events

Retail Sales

0.6 vs 0.4 f’cast, 0.3 prev

Market Movement Recap

08:44 AM Moderately weaker overnight with additional selling after Retail Sales data.  MBS down 3/8ths.  10yr up 5bps at 4.102

12:32 PM Fairly sideways since initial weakness.  Trading levels are exactly the same as the last update

04:42 PM Still exceptionally flat.  MBS and Treasuries both right in line with levels from the previous updates.

This week’s only major economic report arrived this morning and it wasn’t good for bonds.  December’s retail sales came out at 0.6% versus a median forecast of 0.4%. The series continues a pattern of generally defying predictions.  A strong consumer is one of several anecdotal inputs for inflation.  As such, rates don’t love the news.

Mortgage application activity continued its strong post-holiday performance during the week ended January 12. The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of mortgage loan application volume, increased by 10.4 percent on a seasonally adjusted basis from the previous week’s number. The Index had posted a 10 percent gain during the first week of the year, although that number reflected an adjustment to account for the New Year holiday. On an unadjusted basis, the Index rose 26.0 percent. The Refinance Index increased 11.0 percent from the previous week and was 10.0 percent higher than the same week one year ago. Refinancing accounted for 37.5 percent of total applications compared to 38.3 percent the previous week. [refiappschart] The Purchase Index increased 9.0 percent seasonally adjusted and 28.0 percent before adjustment. It remains down 20 percent on an annual basis. [purchaseappschart] “Mortgage rates declined across all loan types as Treasury yields moved lower last week on incoming inflation data, which helped to support a rise in mortgage applications. The 30-year fixed-rate decreased six basis points to 6.75 percent, the lowest rate in three weeks,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Compared to a holiday-adjusted week, both purchase and refinance applications were up, and the increases were heavily driven by the conventional market. Although purchase activity is lagging year-ago levels, refinance applications have improved from their recent low point and have been showing year-over-year gains, albeit at low levels . If rates continue to ease, MBA is cautiously optimistic that home purchases will pick up in the coming months.” 

Today I am in San Diego for the SD CAMP event. At the same latitude, a poll was taken by Texas Governor Greg Abbott’s office which asked whether people who live in Texas think illegal immigration is a serious problem. 29 percent of respondents answered: “Yes, it is a serious problem.” 71 percent of respondents answered: “No es una problema seriosa.” (Did you know that Texas even has its own pledge of allegiance?) Politics aside, Texas is home to many lenders. And many hotels. Marriott certainly has the business travel market dialed in, but just six companies in the United States control 80 percent of branded hotels, and two companies (Choice Hotels and Wyndham) may merge giving us five. Choice owns Radisson, Quality Inn and Econolodge brands; Wyndham owns Ramada, La Quinta, Days Inn, Super 8, and Howard Johnson. If a takeover/merger occurs, 16,500 hotels and 46 brands will be run by a single entity. Yikes! Today’s podcast can be found here, and this week’s is brought to you by nCino, makers of the nCino Mortgage Suite for the modern mortgage lender. nCino Mortgage Suite’s three core products (nCino Mortgage, nCino Incentive Compensation, and nCino Mortgage Analytics) unite the people, systems, and stages of the mortgage process. Today’s features an interview with nCino’s Pam Faulkner on a topic that every mortgage lender has to contend with: change management. Lender and Broker Services and Software Short-term rental analysis product announcement! Opteon AMC, a top nationwide appraisal management company (AMC), announced its pioneering Short-Term Rental Analysis (STRA) product last week. The first of its kind on the market, Opteon collaborated with AirDNA, a leading short-term rental (STR) data and analytics provider, on this innovative tool set to revolutionize how non-QM lenders assess properties for STR investment. It will equip lenders with accurate rental potential, occupancy rate predictions, market trends with comparables, and an expert appraiser analysis. This appraiser-approved Short-Term Rental Analysis replaces the existing 1007 form which, while widely used, falls short in addressing the unique dynamics of STR investments. Opteon and AirDNA partnered together to create a simple, comprehensive solution that promises to reshape the appraisal process for STRs. This product is exclusively available to Opteon customers as of January 8, 2023. To learn more, visit: www.opteonusa.com or contact sales@opteonusa.com.

The Seattle bank’s stock price fell in 2023 amid concerns over rising interest rates and its concentration of multifamily loans. The buyer is FirstSun Capital Bancorp, which raised $175 million as part of the deal.

Separately, the agency said it could develop a new type of reverse mortgage securitization, and another RMF development that could affect the bank emerged.

The lender didn’t reveal whether the incident was related to a purported ransomware gang attack last March.

The Federal Reserve governor was one of two to vote against issuing the so-called Basel III endgame proposal. He says work is being done to address issues with the operational risk framework, but that regulators may need to go back to the drawing board for an adequate fix.

Interest rate-related developments have reportedly created an environment where more mortgage firms are interested in selling and investors are eager to buy.

The last few weeks have seen mortgage rates move in a far narrower range compared to the month and a half leading up to December 14th.  That said, the general trend has been higher. Mortgage lenders tend to publish rates only on non-holiday business days.  As such, today was the first day of the current week.  Global markets were open on Monday, however, and Monday’s trading led to U.S. rates starting out with headwinds before the day began. Tuesday’s key calendar event–a Q&A with the Federal Reserve’s Christopher Waller–put additional upward pressure on rates.  The result is the average lender moving back up near the highest levels of the past several weeks, but not quite as high as the middle of last week. To put all of the above in perspective, rates were near 8% when the Nov/Dec rally began and fell into the 6.6s by December 14th.  They’re currently still well under 7%, meaning that a vast majority of the improvement has been retained despite the modest erosion.