Mortgage rates jumped quickly higher yesterday following the higher inflation reading in the Consumer Price Index (CPI). Now today, rates have completely erased the move despite a similar report, the Producer Price Index (PPI) seemingly adding fuel to the inflationary fire. PPI is almost never as big of a deal as CPI when it comes to pushing rates around. That’s still true today, even though rates ultimately moved more than they did yesterday. Specifically, CPI resulted in a bigger, sharper initial move in the underlying bond market that was slowly backtracked afterword. Contrast that to today’s PPI which prompted a bond market shift that was less than half as big, but that happened to be followed by additional, gradual movement in the same direction.  Interestingly, PPI showed much higher annual inflation than expected, and that should have sent rates even higher.  The monthly PPI, however, was on-target.  More importantly, the components of the PPI data that have a bearing on core consumer inflation were much lower.   The bottom line to the paradoxical reaction is that math allows traders to get a really good idea of the forthcoming PCE data (yet another inflation report, and the one the Fed watches most closely) based on CPI and PPI. And in this week’s case, that math says PCE will be lower than previously expected.  When and if that’s revealed to be the case, it would provide a rate-friendly counterpoint to yesterday’s troublesome CPI data.  This is what the market was actually trading this morning as opposed to a PPI reaction in a vacuum. 

Capital markets participants around the world breathed a sigh of relief when Federal Reserve Chair Jerome Powell said Wednesday that President Donald Trump’s calls for lower interest rates won’t lead the central bank to change its rate decisions. “People can be confident that we’ll continue to keep our heads down, do our work, and make our decisions based on what’s happening in the economy.” In addition, lenders and investors took note of him saying, “There are going to be regions of the country where you can’t get a mortgage.” “Rob, I realize that insurance is regulated at the state level, not the federal level. Are you hearing anything about an arrangement, like mortgages, where insurance companies have a certain dollar exposure to properties, but past that, the Federal government steps in to cover homeowner losses?” Yes, there is some chatter about that, especially if the federal government has some concessions from the insurance companies not to exit certain states. The devil’s in the details, but storm severity and monetary losses are not lessening. Homeowner’s insurance issues are not just a California problem, or a Florida problem. (Today’s podcast can be found here and this week’s is sponsored by CoreLogic. Originators who leverage their Marketing Solutions as part of their customer retention practices have seen their pipelines increase by up to 4 times when compared to traditional lead generation methods. Hear an interview with Accunet’s David Wickert on taking over the family business from his father.)

This morning’s econ data included weekly jobless claims, which came in roughly in line with forecasts, and the Producer Price Index (PPI) which was a bit different.  The month over month change in core PPI was as expected, but the annual change jumped 0.3 above expectations (3.6 vs 3.3).  How can that be?  Revisions to the past 4 months affect the annual number without necessarily impacting the monthly number. In this case, both December and October were revised 0.1 higher, thus accounting for the 0.2 increase from last month’s 3.5% core annual PPI. 

Meanwhile, the monthly change in January was not only on target, but also good news for the components that flow through to PCE inflation (which the Fed watches more closely).

Jobless Claims were a non-event, but at least not showing additional labor market tightening.

The net effect in bonds is a relative sigh of relief after yesterday’s high alert following CPI.

Federal Reserve Chair Jerome Powell said insurance companies and banks are already pulling out of disaster-prone areas, which could pose problems.

The Federal Reserve is set to refrain from cutting interest rates for “quite a while,” following a hotter-than-expected inflation report, according to Mohamed El-Erian.

The company more than doubled results over comparable periods and exceeded estimates due to stronger economies of scale and valuation adjustments in its favor.

The latest refinance surge helped lift total application activity up for a second straight week, even as purchases fell, the Mortgage Bankers Association said.

The White House has tapped former Federal Deposit Insurance Corp. Director Jonathan McKernan to lead the Consumer Financial Protection Bureau and attorney Jonathan Gould to lead the Office of the Comptroller of the Currency late Tuesday.

CPI Came in HOT and Bonds Reacted Logically

There’s remarkably little else to observe beyond this morning’s initial commentary.  Bonds did exactly what we would have expected based on the sharply higher inflation reading with 10yr yields popping about 10bps higher and MBS shedding 3/8ths of a point, if there’s any new news, it’s simply that bonds managed to avoid any major additional selling pressure after the initial push in the first 2 hours of trading. Yields are closing out the day right in line with the levels seen 10 minutes after CPI came out.

Econ Data / Events

Core Monthly CPI

0.4 vs 0.3 f’cast, 0.2 prev
unrounded, 0.446

Core annual CPI

3.3 vs 3.1 f’cast, 3.2 prev

Market Movement Recap

08:38 AM Obliterated after CPI.  MBS down almost half a point and 10yr up 11bps at 4.639

01:05 PM modest recovery heading into 10yr auction, but losing some ground afterward.  10yr up 11.1bps at 4.638.  MBS down just over 3/8ths. 

02:52 PM Still relatively flat after initial selling.  10yr up 10.7bps at 4.635.  MBS down just over 3/8ths

Today’s mortgage rate movement is very straightforward.  Unfortunately, it’s also marked by a straight line toward higher levels–in this case, the highest since January 14th. Incidentally, January 14th was the day before the last instance of the Consumer Price Index (CPI), the same inflation report that caused rates to surge higher today.  Back in January, inflation was a bit better than the market was expecting.  Today, it was much worse (i.e. “higher”). Rates are based on bonds, and inflation is an arch enemy of the bond market. To understand this, consider the fact that bonds are “fixed income” investments in that they pay out on a fixed schedule that is determined at origination.  An investor buying a mortgage at any given interest rate is doing to get the same number of dollars in interest regardless of inflation.   In a hypothetical scenario on an extremely small scale, imagine the investor earns 3 dollars this month–enough to buy 12 eggs back in the olden times.  Fast forward to the present and the investor still earns 3 dollars, but inflation means they’ll have to settle for half as many eggs.   In response to the inflation impact, investors effectively require higher interest payments before deciding to invest in fixed income debt like the mortgage market. The average lender moved up by nearly an eighth of a percent, which is actually not as bad as it could have been, all things considered.