Very Restrained Bond Rally Considering The Data’s Implications

Very Restrained Bond Rally Considering The Data’s Implications

Today’s CPI data was hotly anticipated, to say the least, and it did a borderline heroic job of advocating for a huge drop in rates.  Not only did the core M/M number drop to an unrounded 0.065 (implies core annual inflation UNDER 1.0%) but shelter inflation dropped to the lowest levels since the start of the pandemic, roughly in line with the bottom of the pre-pandemic range.  Those ingredients would have allowed the market to cook up a much bigger rally than we saw today, even though we saw the 2nd biggest mortgage rate drop in 2024.  A slower pace is more sustainable.  Markets want to do things right this time.

Market Movement Recap

10:47 AM Immediate rally in response to CPI and mostly holding since then.  MBS up 3/8ths and 10yr down 10bps at 4.184.

02:03 PM modest pull-back after poorly received 30yr auction.  10yr still down 9.1bps at 4.195 and MBS still up more than quarter point.

03:42 PM MBS are still up 10 ticks (.31) in 5.5 coupons but down more than an eighth from mid-day highs.  10yr yields are still down nearly 9bps at 4.20, but that’s up from lows of 4.166.

CFPB Proposed Rule, Correspondent and Wholesale Products; CPI and Employment Driving Rates

I have good news and bad news, which do you normally prefer receiving first? Today (7/11) is Slurpee Day at 7-Eleven (good news), where Citigroup executives might want to head to cheer themselves up after the Federal Reserve Board on Wednesday fined Citigroup $60.6 million (bad news, at least for them) for violating the Board’s 2020 enforcement action, insufficient progress in remediating its problems with data quality management, and failing to implement compensating controls to manage its ongoing risk. When I think of enforcement actions, I think of the CFPB, and yesterday the CFPB was also in the news, issuing a Notice of Proposed Rulemaking related to the mortgage servicing rules in Regulation X. The proposal, if finalized, would require mortgage servicers to focus on helping borrowers, not foreclosing, when a homeowner asks for help. More on that below. And if you’re looking for opinions on that news, check out Last Word tomorrow at 10am PT/1pm ET hosted by Kevin Peranio and Brian Vieaux. (Today’s podcast is found here and this week’s is sponsored by nCino, makers of the nCino Mortgage Suite for the modern mortgage lender, uniting the people, systems, and stages of the mortgage process. Hear an interview with Professor Subodha Kumar on the features of future smart homes.) Lender and Broker Software, Services, and Products “All DPA roads lead to Essex! Essex Mortgage is pleased to announce that they now offer a new 5 percent Down Payment Assistance program, along with improved pricing on 3.5 percent DPA forgivable option. But that’s not all! Essex is also proud to be the master servicer for an innovative FHA loan program. This unique product allows a Government Entity to purchase a property and offer a lease option to consumers who may not qualify for traditional financing. Clients can now secure equitable title after 18 months, opening new doors for homeownership. An added benefit of this program is it allows realtor partners to close their sale as part of the process. Don’t miss out on these exciting opportunities: reach out to your Account Executive today.

This is The Inflation Data You Were Hoping For

The Consumer Price Index (CPI) is the most important economic report for the bond market these days.  The most important line item in that report is month over month core CPI, which excludes food and energy.  That number was forecast to hit 0.2% but instead came in at 0.1, rounded up from 0.065. 

That means if this report were repeated for 12 months, core inflation would be under 0.8% for the year.  Considering the Fed’s inflation target it 2%, it’s no surprise that bonds are rallying in response, even though official year over year core inflation is still over 3%.

To make matters better, the most problematic component of the core CPI numbers–the one that tracks housing expenses–finally made the big downward shift that analysts have been waiting for.  “Shelter” dropped to an unrounded 0.17% from 0.4% last month.  That’s actually lower than most of the PRE-Pandemic trend.

The bond market response was logical and immediate with 10yr yields down about 10bps at 4.18+.  MBS are up more than a quarter point.  Fed rate cut expectations also ramped up significantly, roughly matching the drop seen after the last CPI report.