The initial reaction to this morning’s CPI data has been mixed with weakness initially and now some resilience.  Treasuries are underperforming, partly due to yield curve steepening (longer-term yields rising relative to shorter-term yields), but also perhaps with an eye on forthcoming supply.  Whether we’re looking at Treasuries or MBS, both are disappointingly close to unchanged levels given the build-up to this data. 

That said, one need not be disappointed by bonds continuing to hold 80% of the rally that’s taken place since October. 

What’s Up With Wild Reaction to CPI?

For the level of anticipation heading into it, today’s CPI release was actually rather disappointing.  Core month-over-month numbers came in right in line with forecasts.  Unrounded numbers were a tad high, and some internals caused concern about persistently moderate inflation (specifically, shelter). So it wasn’t a huge surprise to see a negative reaction at first.  Bonds recovered modestly, led by the front end of the yield curve as the long end still had an auction to get through.  After the auction, longer-term bonds caught up somewhat, possibly with help from Fed comments, geopolitical headlines, and a large block trade at the CME.  Ultimately, 10s remained in this week’s same old range, which is a pretty uneventful result on CPI day.

Econ Data / Events

M/M Core CPI

0.3 vs 0.3 f’cast, 0.3 prev

Y/Y Core CPI

3.9 vs 3.8 f’cast, 4.0 prev

Jobless Claims

202k vs 210k f’cast, 203k prev

Market Movement Recap

08:41 AM Weaker after CPI, 10yr up 1bp at 4.042.  MBS down 7 ticks (.23).

11:35 AM Decent recovery after initial weakness.  MBS up 3 ticks (0.09).  10yr underperforming, up 1.1bps at 4.043.

01:41 PM No major reaction to Treasury auction.  MBS up 5 ticks (.16) and 10yr perfectly unchanged at 4.032.

02:33 PM Very big block trade in 5s just after 2pm added fuel to the bounce back.  10yr down 4.2bps at 3.99.  MBS up 9 ticks (.28).

04:10 PM Holding the gains.  10yr down 4.7bps at 3.985.  MBS up just over 3/8ths.

Our Federal Reserve doesn’t control events around the world, like a ship being stuck in the Suez Canal, or the current Red Sea geopolitical aggression, or China raising chip prices, or OPEC raising gasoline prices, or… or… or. So, consumer and producer prices are always a bit of a wild card. Since they influence the Federal Reserve’s actions, and therefore, in turn, mortgage rates, inflation has certainly been in the news for some years now. (There’s even a joke about inflation at the bottom.) The Consumer Price Index (CPI) is designed to broadly capture changes in the prices of goods and services purchased by U.S. consumers. The largest component is housing, with a weight of 45 percent. Next is transportation at 17 percent, then food and beverages at 14 percent, medical care at 8 percent, education and communication are 6 percent, recreation is 5 percent, other goods and services 3 percent, and then apparel at 2.6 percent. (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.) Lender and Broker Services and Software “Start off the new year celebrating your independence by connecting with Optimal Blue at the MBA Independent Mortgage Bankers Conference, Jan. 22 – 24 in New Orleans. As a proud sponsor, our capital markets experts will be set up at Table #1 and ready to talk about your 2024 goals. Trying to operate more profitably? Interested in finding new efficiencies? Ready to work with a proven and respected technology partner? We’re ready to discuss these goals and more. Let us tell you what it means to work with Optimal Blue to leverage the industry’s only end-to-end capital markets platform. Pay us a visit at IMB24 or reach out to our team directly.”

Most of the legal filings accuse the title insurer and its subsidiary, LoanCare, of failing to protect the personal identifiable information of customers.

Meanwhile, issuance in the far smaller private-label residential mortgage-backed securities market has shown relative strength so far this year, as forecast.

The agency plans to restrict access to a system that provides borrower tax returns to mortgage lenders beginning June 30. Left out of the loop, small-business lenders say getting credit to borrowers will become more difficult as a result.

Former employees in the case sued Sprout for wages lost when it abruptly shut down. Separately, a former executive is facing a court procedure-related fine.

Both companies saw their stock rating cut because of their current valuation, similar to why Rocket’s was previously dropped. They declined comment on the move.

The first thing to understand about mortgage rates over the past 3-4 weeks is that they haven’t been moving nearly as quickly as the preceding months.  As such, “4 week highs” is a more dramatic designation than reality deserves, but it is nonetheless the reality. Or at least it was the reality yesterday.  Today’s rates were modestly lower, but again, we’re dealing with a very narrow range overall and very small day to day movements.  The average borrower may not even see any change in their rate scenario since last week.  The prospect for change is much greater tomorrow.  At the very least, the scheduled events have far more potential to cause bigger movement in either direction.  The event in question is the release of December’s Consumer Price Index (CPI), a key inflation report with a consistent track record of market movement. Economists and investors spend a significant amount of time and energy coming to a consensus on how the report is likely to come out.  As such, there’s no legitimate way to predict whether the data will be good or bad for rates unless there’s also a legitimate way to predict the future. Last note: just because this report CAN cause a big reaction in rates doesn’t mean it always WILL. The size of the reaction is generally proportionate to the size of the departure from the consensus.  Specifically, the most important number (Core month over month CPI) is expected to come in at 0.3%.  If it instead came in at 0.1%, that’s a pretty big miss and one that would almost certainly push rates lower in a meaningful way.  Conversely, a result of 0.5% would likely send rates rapidly higher.

At Least We Won’t Be Waiting For CPI Anymore

The present week has been a bit boring, for lack of a gentler term.  In fact, it’s been downright forgettable, but that’s often the case when rates have been on a big trip and are weighing their options for the next move ahead of a key piece of data.  There was some small chance that this week’s Treasury auctions would act as a bit of an opening act for Thursday’s big show (CPI), but today’s 10yr auction didn’t produce a measurable reaction.  Intraday momentum was weaker, but only after opening at stronger levels.  Combine that with the slow pace of selling and Wednesday is yet another day that fits the “sideways and narrower ahead of CPI” narrative.

Market Movement Recap

09:33 AM Modest gains overnight as European yields hold a ceiling.  10yr down 2.6bps.  MBS up 5 ticks (.16).

10:47 AM Well off highs with slow, steady selling since 9:30am.  MBS still up 3 ticks (0.09) but down an eighth from highs.  10yr yield down 0.4bps at 4.011.

03:20 PM Weaker through mid-day and leveling off now.  MBS down 2 ticks (0.06). 10yr up 1.7bps at 4.032.