Good Week For Bonds. Next One Could be Interesting

The bond market traded about as well as anyone could have expected on a week where core monthly CPI came out at 0.3 vs 0.3.  If anything, the level of bullishness and resilience was a bit higher than the average market participant probably expected relative to the available data.  Part of the reason is speculation that we’re about to receive some sort of confirmation that the Fed is willing to remain friendly despite the big drop in rates at the end of 2023.  There’s specific speculation that Tuesday’s appearance by Waller will contain clues about the Fed’s road map.  We can’t know if it will or won’t… only that it would make for an interesting start to the holiday-shortened week.

Econ Data / Events

M/M Core PPI

0.0 vs 0.2 f’ cast, 0.0 prev

Market Movement Recap

09:34 AM Slightly weaker overnight, but now stronger after PPI data. 10yr down 2.7bps at 3.948.  MBS up 3 ticks (.09).

02:37 PM Sideways to slightly weaker but leveling off into the PM hours.  MBS up 2 ticks (.06).  10yr down 1.9bps at 3.956

04:45 PM Heading out with resilience intact.  MBS up 3 ticks (.09) and 10yr down 3.6bps at 3.939.

I received this call yesterday from an LO friend. “Rob, I was talking to my ‘hair-apist’ last night, and I was telling her about how our industry has been a real roller coaster in terms of income for people and companies. People need their hair cut regularly, but certainly people don’t need home loans regularly. We’re all keeping our fingers crossed that 2024 is an okay year.” First off, hats off on the “hair-apist” line. (Is there also “hair-apy”?) Second, lenders are doing what they can to at least stay profitable. In fact, STRATMOR’s current blog is titled, “Adjusting Loan Officer Compensation to Improve Profitability.” Many lenders tend to move in a pack, based on rates, regulatory environment, or volumes, and despite an uptick in locks in November which resulted in decent December fundings for many, lenders find themselves back looking at overhead, tech and investor mix, and lead source. Regarding the latter, BankingBridge opined on its sponsored “top mortgage lead providers for 2024”: Bankrate, BestMoney, Credit Karma, LendingTree, Money, Movoto, NerdWallet, Own Up, and Zillow. (I know nothing about the merits or drawbacks of any of them, but perhaps they’ll give you some ideas.) Today’s podcast can be found here, and this week’s is sponsored by Truework. By connecting every verification method into one platform, Truework helps lenders eliminate process disruptions, maintain a competitive borrower experience, and reduce the fiscal impact of verifying income.

The much-anticipated Consumer Price Index (CPI) was released this week. For those seeking evidence that inflation will soon be back at the Fed’s target level, it wasn’t the triumph it might have been. Even so, rates managed to move lower. Mortgage rates and, indeed, most rates are determined by trading levels in the bond market.  Bond yields/rates move higher when inflation is high, and the market has been waiting on signs of lower inflation before trading in a way that allows interest rates to move lower. The Consumer Price Index (CPI) is the biggest name in monthly inflation reports.  It’s caused big reactions in rates many times over the past few years.  In recent months, it’s been showing more and more promise regarding a return to inflation levels that would allow for significantly lower rates. But CPI has given false hope before, so traders are wary.  This week’s report definitely stopped short of providing resounding confirmation that inflation is defeated.  That said, it didn’t send any signals that were too troubling either.   With that in mind, it’s not too surprising that rates actually didn’t move much in response to CPI.  If anything, the initial impulse was toward slightly higher rates.  It wasn’t until the following day’s Producer Price Index (PPI) that bond traders saw better evidence of calmer inflation. Both CPI and PPI have been moving lower, but PPI is now all the way back down to target levels.

PPI (Producer Price Index) measures inflation at the wholesale level.  It is not known or respected as being a reliable or significant market mover, but sometimes it makes a dent.  Today is one of those times, likely because PPI was at least willing to offer a thought about inflation that broke from the forecast consensus in a way that yesterday’s CPI did not.  Specifically, CPI’s most important component (core M/M) came in at 0.3 vs a 0.3 forecast.  Contrast that to this morning’s PPI that showed core M/M at 0.0 vs a 0.2 f’cast and the market feels like it has something small to trade.

Here’s a “food for thought” chart on core PPI vs CPI.  It begs the question: why doesn’t the market pay more attention to PPI?  It seems to have done a good job being an advance indicator at first glance.  But the clue is the 2015 time frame when PPI fell to near zero while CPI continued higher and never swooned.

The guidance also underscores consumer rights to obtain access to their own information as well as identities of sources providing data.

Marina Wiant was named to head California treasurer committees that set the debt limit, determine how the private-activity capacity is deployed and play a critical role in financing the construction of affordable rental housing in the state.

The Federal Trade Commission became able to distribute more than $1.2 million after a legal battle in which a Supreme Court decision came into play.

For the past week, the benchmark 10-year Treasury closed above 4%, as the markets priced in an increase in the consumer price index.

John Williams, who also serves as vice chair of the Federal Open Market Committee, does not expect the Federal Reserve to slow its balance sheet runoff anytime soon.

Mortgage rates are based on bonds.  Bonds react more to two monthly economic reports than any others.  One of these is the jobs report which came out last week.  The other is/was today’s consumer price index (CPI).  With Friday’s jobs report being arguably rather middle-of-the-road in terms of its rate implications, bonds/rates potentially had some pent up momentum behind today’s reaction. Fortunately and unfortunately, today’s data was also fairly unequivocal relative to some recent examples.  It caused a confused, 2-way reaction in bonds early in the day, but one that quickly gave way to mortgage-specific bonds holding their ground in a way that allowed mortgage lenders to keep rates in line with yesterday’s, or just a hair better. As the day progressed, other developments led to additional gains in the bond market, thus allowing many mortgage lenders to reissue rates that were slightly lower still.  The net effect is the average mortgage lender offering top tier conventional 30yr fixed rates at the lowest levels since last Wednesday.  This isn’t an especially big move considering the narrow range since then, but at least it’s in everyone’s favorite direction.