Bonds Will Rally After CPI (Or They’ll Sell Off)

Let’s not build up the upcoming CPI data too much.  It’s important and it is highly likely to result in a level of bond market movement commensurate with its distance from forecasts.  But that distance can be seen both above and below the forecast levels.  Each option carries a different implication for the rate reaction and there’s no way to know which option we’ll get ahead of time.  What we CAN know with relative certainty is that the bigger the “beat” the larger the jump in rates should be.  The bigger the “miss,” the bigger the drop in rates.  

Market Movement Recap

09:19 AM Modestly stronger overnight with yields as low as 3.95.  Slight bounce early but still down 1.4bps at 3.986.  MBS up 1 tick (0.03).

02:35 PM Modest gains in the PM hours, but giving them up now.  Bonds at exactly the same levels as the last update.

Don’t forget that today, 7-11, is Free Slurpee Day, but that this Sunday the price of a first-class mail stamp is going up from 63 cents to 66 cents, the second price hike of the year since the stamps cost just 60 cents as of January. Stamps are a case study in inflation and economics, especially as the ability to send things like payments or marketing materially electronically has increased and becomes more cost effective, further driving up the cost of stamps. (Fewer stamps are being sold but they still must help cover the costs of the post office.) Inflation, the economy, and the labor picture have certainly destroyed the predictions some had earlier this year about where interest rates would be now, and STRATMOR’s current blog is titled, “Interest Rates are Like the Weather. Or Like Signs of the Zodiac?” What has also gone up, besides rates, is the number of institutions reporting HMDA data: 4,460 institutions reported data for 2022, up 2.3 percent from 2021. That’s a lot of competitors, huh? (Today’s podcast can be found here and this week’s is sponsored by SimpleNexus, the homeownership platform that unites the people, systems, and stages of the mortgage process into one seamless, end-to-end solution that spans engagement, origination, closing, incentive compensation, and business intelligence. Hear an interview with Flagstar Bank’s Jeff Neufeld on the warehouse lending space.) Lender and Broker Software, Services, and Products As interest rates and home prices rise, savvy lenders are attracting coveted purchase business by supporting homebuyer assistance programs that are in high demand. (Did you hear about the CalHFA program that ran out of funding after 2,300 borrowers nabbed DPA over 11 days?) Luckily, lenders can do well while supporting DPA, and the MBA’s Profit & Succeed with DPA webinar reveals how. Tune in to let Mark Hasson of Lennar Mortgage, Kate McDougall of Lake Michigan Credit Union and experts from Down Payment Resource inspire you with how their organizations have profitably operationalized DPA and established themselves as valuable community resources in the process. Catch it on demand here. Ready to jump on the DPA bandwagon? Keep your referral network happy and your pipelines full by partnering with Down Payment Resource.

While experts might be able to debate the underlying causes, they can all agree that inflation is the key reason that rates skyrocketed at the fastest pace in decades to the highest levels in decades in 2022.  They could also mostly agree that the persistent of inflation coincides with the persistence of high rates. The Consumer Price Index (CPI) is one of the most important measurements of inflation on any given month, and the latest installment will be out tomorrow morning.   Economists submit forecasts to data aggregators, and the median forecast becomes the consensus.  If the actual number is above or below the consensus, rates tend to rise or fall accordingly.   Tomorrow’s CPI will be out before most any mortgage lender has published rates for the day.  That means a loan would need to be locked by today in order to avoid rolling the dice with tomorrow’s CPI reaction.

After last Friday’s jobs report, it was clear that we’d be waiting for this Wednesday’s CPI data as the next relevant input for the bond market.  Despite the absence of new motivation, bonds have been able to rally back from the highest yields in months seen on Friday.  Given the pace of last week’s selling and the levels achieved, a token technical correction is more than enough justification for the gains seen early this week.  Today begins with just a bit more buying although, at 3.98, yields are well above the next significant rally target at 3.84.  
In fact, yields are already facing some technical resistance at 3.96–a level that coincides with the domestic session lows seen last Thursday.

Construction is heating up, but just 40% of new units are single-family residential properties, the firm’s data analytics arm said.

Nearly all Fed participants support additional increases in interest rates in 2023, with the Federal Reserve Bank of Atlanta President as an exception who has called for holding steady for the rest of this year and “well into 2024.”

Adjusted for inflation, consumer spending has largely stalled after surging at the start of the year. Delinquency rates, meanwhile, are ticking up.

The Cleveland-based regional bank recently announced a $20 million line of credit for Lendistry, a Los Angeles-based, minority-led community development financial institution.

The $4 billion-asset United Federal Credit Union partnered with the Nevada Housing Division to offer first-time homebuyers access to down-payment assistance.

Sideways at Weak Levels Despite Monday’s Rally

If we wanted to make the case for anything about the first two days of this week being interesting, we’d be forced to lie.  We could say grandiose things that allude to interest rates making some sort of triumphant stand at the castle walls that separate 7%+ mortgage rates and 4%+ Treasury yields from everything lower, but we’re really just waiting to see how Wednesday’s CPI changes the current sideways grind (which is just a narrow range inside a larger narrow range).

Econ Data / Events

Wholesale Inventories

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Market Movement Recap

09:40 AM Some volatility surrounding 8:20 CME and 9:30 NYSE opens.  MBS up a quarter point.  10s down 2 bps at 4.046.

11:30 AM Additional gains.  10yr down almost 6bps at 4.008.  MBS up 3/8ths.  

03:47 PM ZZZzzz…  Same levels as the last update as bonds leveled off after the AM rally.