After a few days where it’s been somewhat challenging to sort through the most relevant market movement considerations (war vs Fed speakers vs technicals), we finally have a logical, obvious correlation between a known market mover and the resulting market movement.  While the edification of “data dependency” is nice to see, the direction of the movement isn’t as nice.  In today’s case, a moderately hotter CPI reading brings an end to two days of rally momentum and is currently pushing yields higher.

Numbers the Federal Housing Finance Agency just reported for 2022 were the third lowest since the program began, and this year’s probably won’t be high either.

Proceeds from the sale of assets to Oaktree Funding would be used to pay off debt to warehouse lenders

The Federal Reserve Governor’s remarks sounded somewhat less hawkish than her comments on Oct. 2, when she said multiple rate hikes would likely be needed to contain price pressures.

As housing-industry groups sought relief from the Federal Reserve, overall loan-application volumes eked out a weekly gain last week thanks to ARM activity, the Mortgage Bankers Association said.

The Consumer Financial Protection Bureau alleged in a lawsuit that the nonbank lender violated a 2019 consent order and submitted incorrect information in 2020.

The holiday-shortened week began yesterday with a substantial decline in average mortgage rates.  Caveats abound, however.  They include things like the bond market making up for an extra day of trading due to the bank holiday, the flare up of the Israel-Gaza conflict, and a marked shift in tone from several Federal Reserve speakers.  All of that arrived against the backdrop of a rate trend that was desperately looking to justify a correction. Bonds improved again today, but not as sharply as yesterday.  The average mortgage lender improved by only a small amount for top tier 30yr fixed scenarios. Depending on the lender, many borrowers may not see much of a change, but several lenders released improvements in the afternoon. Any improvement is notable as it happened despite an unexpected uptick in wholesale inflation as seen in the Producer Price Index (PPI) this morning.  Inflation is the key reason for high rates, so when it’s higher than expected, rates are more likely to move higher.  The fact that this didn’t happen this morning can mean markets are more focused on geopolitical risks, the evolution of Fed policy, and more relevant data in the days ahead. Specifically, PPI is easily the lesser of the two when compared to tomorrow’s Consumer Price Index (CPI).  If CPI is much higher or lower than expected, we’re more likely to see rates react in a logical way.  

This morning’s only upper tier economic report, The Producer Price Index (PPI), came out a bit hotter than expected with a fairly significant revision to previous months.  The revision brought the year-over-year core level to 2.5 last month versus an initially-reported 2.2%.  In turn, that allowed the current data to beat the median forecast of 2.3% by a whopping 0.4%.  Despite the higher inflation, bonds are adding to overnight gains.  Yields have now fully erased last week’s weakness and are just over 30bps lower versus Friday’s peak.

Once again, we only have geopolitical considerations and the pervasive
Still to come: 10yr Treasury auction at 1pm.  This will be a good, quick acid test for the digestion of sharply lower yields.  An hour later, we’ll get the Minutes from the most recent Fed meeting (3 weeks ago).  This is best thought of as a potential market mover, but one that tends to not result in the same sort of mandatory volatility as an actual Fed day.

Why Are Bonds Still Rallying?

Bonds have seen only a few examples of a solid 2-day rally over the past few months.  While the present example is the largest in terms of the ground covered, it also began from the highest starting point and from the most sharply oversold technical levels.  That’s the backdrop for a discussion on why bonds are still rallying.  The brushstrokes involve geopolitical turmoil, global economic uncertainty, and an increasingly unanimous opinion among Fed speakers regarding a shift in the rate outlook and in the economy itself.  All of the above was enough for the bond market to largely ignore hotter PPI data this morning and a softer 10yr Treasury auction this afternoon.  We suspect Thursday’s CPI will get more attention if it’s very far off the median forecast. 

Econ Data / Events

Core PPI m/m

0.3 vs 0.3 f’cast, 0.2 prev

Core PPI y/y

2.7 vs 2.3 f’cast, 2.2 prev

Headline PPI m/m

0.5 vs 0.3 f’cast, 0.7 prev

Market Movement Recap

09:05 AM Stronger overnight. Briefly weaker after data, but selling is over.  10yr down 7.4bps at 4.583.  MBS up just over an eighth of a point. 

12:22 PM Additional gains heading into PM hours.  10yr down 7.8 bps at 4.579.  MBS up just over a quarter point. 

01:10 PM Some selling after auction.  10yr still down 4.1bps at 4.616.  MBS still up 5 ticks (.16), but down more than an eighth from highs.

02:19 PM Effectively no reaction to Fed minutes.  10yr down 5.1bps at 4.606.  MBS up an eighth. 

04:42 PM Best levels of the day after hours.  10yr down 9.5bps at 4.562.  MBS up 3/8ths.

A reduction in adjustable mortgage rates led some cost-stressed borrowers to forsake fixed-rate security and drove mortgage application volume up slightly during the week ended October 6.   The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of that volume, increased 0.6 percent on a seasonally adjusted basis after a 6.0 percent drop a week earlier. On an unadjusted basis, the Index increased 1.0 percent.   The Refinance Index rose 0.3 percent compared to the prior week and was 9.0 percent lower than the same week one year ago. The refinance share of mortgage activity dipped to 31.6 percent of total applications from 31.7 percent. [refiappschart] The Purchase Index was 1 percent higher than a week earlier on both a seasonally adjusted and an unadjusted basis. It was 19 percent below its level during the same week in 2023. [purchaseappschart] “While most mortgage rates increased last week, rates on ARMs [adjustable-rate mortgages] declined, leading to an increase in ARM volume and an increase in overall applications. The level of ARM applications increased by 15 percent over the week, bringing the ARM share up to 9.2 percent of all applications , the highest share since November 2022. The yield curve has become less inverted in recent weeks and ARM pricing has certainly improved,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed mortgage rate is at 7.67 percent – the highest level since 2000 and 40 basis points higher than a month ago. Application activity remains depressed and close to multi-decade lows, with purchase applications still almost 20 percent behind last year’s pace. Refinance applications also continue to be limited, and the average loan size has fallen to its lowest level since 2017.”