Dots, Dots, Dots, Dots

What’s the most important ingredient in tomorrow’s Fed announcement and related events?  The dots, of course! Released in the Fed’s quarterly summary of economic projections, the dot plot shows where each FOMC member sees the Fed Funds Rate at various points in the future.  Powell has instructed markets to ignore the dots on multiple occasions, but traders keep trading them.  We see no reason for that to change this time around.  Indeed, with Powell bound to repeat the same speech he’s been giving for the past several months, the dot plot is one of the only places we can see interesting things happen.

Econ Data / Events

Core M/M CPI

0.3 vs 0.3 f’cast, 0.2 prev

Core Y/Y CPI

4.0 vs 4.0 f’cast, 4.0 prev

Market Movement Recap

08:42 AM Initially stronger and now weaker after CPI.  Still stronger day over day.  MBS up 2 ticks (0.06) and 10yr down 1.7bps at 4.22 (up from lows of 4.153).

12:30 PM Decent recovery for MBS with 6.0 coupons now up an eighth on the day.  10yr down 1bp at 4.227, broadly sideways after the initial sell-off.

01:08 PM Additional gains after 30yr bond auction.  10yr down 3.1bps at 4.206.  MBS up 3 ticks (.09).

03:59 PM Gradual gains continue. MBS near best levels, up 6 ticks (.19). 10yr down 3bps at 4.206.

The relationship between data and market movement is both brutally simple and frustratingly nuanced depending on the circumstances.  More often than not, we’ll see a logical move in a logical direction when there’s an obviously large discrepancy between reality and forecasts.  Other times, “internal components” (the sub headings that add up to comprise the overall headline) can paint a different picture than the headline itself.  This dynamic is increasingly likely the closer the top line numbers are to the consensus, as was the case in this morning’s CPI.
In fact, the initial move in the first 20-30 seconds after the release was friendly for bonds.  Moments later, the gains began to fade as traders considered the internals.  Specifically:

Core services inflation 0.5 vs 0.3 previously, led by a 0.5 vs 0.4 uptick in Owners Equivalent Rent (OER) and a 0.6 vs 0.3 uptick in medical care services
Energy commodities continue subtracting a solid amount from overall inflation, and the energy price correction will not last.

The result for bonds has been a return to unchanged levels before 10am.  It’s not a huge deal in the bigger picture, but it is a surprising result for anyone who’s not digging into the internal components. 

Today I head to Northern California, home of plenty of technology. The other day I went to the doctor and the receptionist handed me a tablet and said, “Please fill out these medical forms on the screen, which are identical to the ones you filled out earlier online, and have the exact same questions your doctor will ask you later in the exam room.” Great. There’s nothing like old-fashioned printed things. I am sure that menu Quick Response (QR) codes are fine, but plenty of other QR codes are not: beware! “The Federal Trade Commission (FTC) warned the public against scanning any old QR code in a consumer alerts blog last week. Naturally, the warning comes down to security and privacy: bad actors can put QR codes in inconspicuous places or send them via text or email, then just sit back and wait for a payday in the form of money, logins, or other sensitive information. Lord knows that the mortgage industry has enough challenges from lousy characters without more of it coming our way! (Today’s podcast can be found here, and this week’s is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology and other services to the mortgage industry for almost four decades. Today’s has an interview with Clear Capital’s Kenon Chen putting a bow on the real estate market in 2023 and why 2024 brings reasons for optimism.) Lender and Broker Products, Programs, and Services Are you missing out on originating more government-backed loans? A whopping 44 percent of purchase loans for 1–4-unit properties in the top 10 MSAs in the United States would be potentially eligible for down payment assistance. That’s according to a newly released Urban Institute (UI) study. UI partnered with Down Payment Resource (DPR) to analyze 2022 HMDA data and DPA data from the 10 largest MSAs. Among the findings, the report says that across channels, FHA and USDA loans are most likely to be eligible at 80 and 82 percent, respectively and that FHA and USDA loans are generally eligible for a greater number of programs than conventional or VA loans. For more insight into how DPA programs could help you fund more government-insured mortgages, schedule a demo with the DPR team.

The Federal Reserve will need to start hitting the brakes on the unwind of its balance sheet as the outlook for the central bank’s reserves grows increasingly murky, according to Wrightson ICAP.

The magistrate ordered a fine and possible detainment for a former company president now working for another lender.

The judge also sealed a document in the lawsuit the AARP Foundation joined but the defendants still must produce fee codes in the proposed class action.

Internet-based banks are siphoning deposits away from urban centers in the U.S. and, unlike brick-and-mortar banks, face no requirement that they loan money back into those communities.

Bonds Breathe Sigh of Relief After Auctions. CPI Up Next

It’s been quite a while since we’ve dusted off the ‘PSR’ abbreviation, which is short for “post-supply rally.”  The supply in question is the scheduled auction of US Treasuries.  At times in the past, merely getting through a set of Treasury auctions was often worth a sigh of relief, expressed in the form of additional bond buying.  While that dynamic hasn’t been as noticeable as it once was, today was an exception.  In other words, yields were a bit higher until a few minutes after the day’s last Treasury auction, but then began to fall almost all the way back to ‘unchanged.’ Even if they hadn’t fallen, today’s trading would leave the bond market in fine shape to digest Tuesday’s CPI data, one of this week’s two big ticket events.  The stakes are high, but the reaction function is simple: higher/lower inflation = higher/lower rates.

Econ Data / Events

3yr Treasury Auction

4.49 vs 4.473 f’cast
bid to cover 2.42x vs 2.74x avg

Market Movement Recap

09:13 AM Modest, steady weakness overnight with a bit more selling at 8:20am CME open.  10yr up 4bps at 4.268.  MBS down 3 ticks (.09).

11:49 AM Gradual weakness is the backdrop, with some specific selling after 3yr Treasury auction.  10s up 5.1bps at 4.279.  MBS down just over a quarter point.

01:04 PM no major reaction to mixed 10yr auction.  10s up 4.8bps at 4.276.  MBS down a quarter point.

02:14 PM Nice recovery after 10yr auction.  10s now up less than 1bp at 4.235.  MBS down less than an eighth.  Both are at best levels.

03:25 PM Generally holding gains.  MBS down 3 ticks (.09) and 10yr up 1.1bps at 4.239.

Mortgage rates are based on bonds and the bond market is coming off an important and largely successful week.  It was important because it was the first week since the November 14th Consumer Price Index (a key inflation report that often causes movement in rates) that brought other economic data of similar significance.  It was successful because the balance of that data was not economically strong enough to do much damage to the recent winning streak. In other words, rates have fallen significantly from their decades-high ceiling in October due to softer economic data and we have yet to see an economic report that argues against that softening in an overly convincing way.  To be sure, last week’s jobs report was very good relative to historic norms, but not good enough to derail the narrative of a normalizing economy. Jobs aside, inflation is the biggest nemesis for bonds/rates and the Consumer Price Index (CPI) is the biggest monthly revelation on the state of inflation.  That’s precisely why tomorrow’s volatility potential is higher.  The latest CPI will be released at 8:30am.  If it’s higher than forecast, rates should rise.  If it’s lower, rates should fall.  If it comes in very far from forecasts, the movement could be quite abrupt. As for today specifically, it ended up being mostly a placeholder ahead of CPI.  The average mortgage lender was offering rates that were just a hair higher than Friday’s, but several lenders made friendly adjustments in the afternoon in response to improvements in the bond market.  

If olive oil is made from olives, what is baby oil made from? The regulatory framework, some would say “tangled web,” facing lenders is made from hundreds of federal, state, state, local, and quasi-governmental bodies. Analogies aside, near the top of the heap is the Consumer Finance Protection Bureau. The CFPB makes its priorities known and is concerned with redlining among other things. The CFPB can’t do anything about rising credit score costs, but for some reason people think it can. On Wednesday at 2PM ET, 9AM HT, the CFPB’s Mark McArdle will be educating us in a session sponsored by L1. (If you have questions you’d like asked, submit them to Robbie Chrisman.) The show will not be recorded, so tune in. Today’s podcast can be found here, and this week’s is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology and other services to the mortgage industry for almost four decades. Today’s has an interview with Change Wholesale’s Jeff Seabold on how lenders in the non-QM space plan to navigate amid higher interest rates, a growing affordability crisis, and other macroeconomic headwinds. Lender and Broker Products, Programs, and Services Popular history tells us the U.S. gold craze began with the rush of 1849 in California, but the first documented gold finding in America actually occurred half a century earlier in North Carolina. In 1799, 12-year-old Conrad Reed found a 17-pound nugget of pure gold while fishing in a creek just outside of Charlotte. Another golden opportunity awaits mortgage lenders in Charlotte this spring, as nCino is seeking speaking proposals for its nSight 2024 conference taking place May 14–16. If you’re an nCino Mortgage customer interested in sharing a success story or industry perspective, submit a speaking proposal by December 15. The final speakers selected receive free nSight registration!