Seemingly overnight (i.e. over the past 30 days when it comes to markets reacting to economic data), the CPI and PPI inflation numbers that normally impact bonds have been overlooked in favor of a handful of line items buried within each report.  The line items in question are those that impact the PCE price index (released 2 weeks from now). In today’s case, those specific line items pointed toward higher PCE inflation even though headline/core PPI inflation was lower than forecast. 

To recap, PCE is a more important inflation number than CPI or PPI, but CPI/PPI come out 2 weeks earlier and several of their components flow directly into the PCE calculation.  For the 2nd day in a row, those components were higher (bad for bonds), even though CPI/PPI came in lower. 

Teddy Roosevelt thought that lawyers are trained to serve clients and not justice. An interesting discussion topic. Residential lending certainly has its share of legal proceedings and suits, but commercial lending does as well. For example, Wells Fargo is suing JPMorgan over a troubled $481 million commercial real estate loan made in 2019 to “recover losses for investors on the loan allegedly based on fraudulently inflated net operating income by 25 percent. According to the complaint in Manhattan federal court, JPMorgan went ahead with the loan, knowing it would eventually be sold in pieces to unwitting investors. The borrower defaulted in 2022 and still owes more than $285 million, while investors have lost tens of millions of dollars, Wells Fargo said. Wells Fargo wants New York-based JPMorgan to repurchase the loan, less amounts the trust received from sales of underlying properties, or else pay damages for breach of contract. In the residential world, the talk of repurchase requests by Freddie and Fannie has died down, but it is still a possibility and the cost of handling and defending against those requests, or dealing with repurchases, is certainly added to the cost of business for lenders. (Today’s podcast can be found here and this week’s is sponsored by TransUnion. TransUnion offers thousands of B2B solutions designed to address the unique needs of mortgage lenders, especially for their identity-focused, data-driven mortgage insights and solutions. Hear an interview with TRAiNED’s Jonathan Freed on what problems AI can solve in mortgage lending and how successful lenders are embracing it.)

Mortgage rates hit their highest levels in just over 2 weeks yesterday and they were on track to remain unchanged today. In fact, the average lender offered the exact same 30yr fixed rate when this morning’s initial barrage of rate sheets came out. Lenders typically publish their first rates of the day around 10am ET, and they prefer to avoid any do-overs. But because rates are based on bonds, when the underlying bond market moves enough, lenders can opt to update their offerings. In the mortgage industry, these instances are referred to as “reprices.”  Reprices can happen in either direction.  Today’s were positive (i.e. lower rates). This was made possible by bond market improvement that came at the expense of stock market weakness.  Stocks and bonds don’t always have this type of push and pull relationship, but it has been more common in recent weeks as stocks swoon. Despite the improvement, the general trend in rates has been sideways to slightly higher, but inside the lowest, narrowest range since October.  

A trio of trends — rates, prices and economic uncertainty — will dominate the 2025 Spring buying season and likely affect activity, Realtor.com warned.

Now the structured mortgage securities are cheap enough that CLO investors are watching them more closely, according to strategists and investors.

With focus turning to increased domestic production, the Chicago Mercantile Exchange plans to launch a new lumber futures trading exchange in late March.

The legislative proposal highlights tensions around broader utilization of partial claim-style mortgage options and the VA’s particular difficulty funding one.

Sen. Mike Rounds, R-S.D., has filed a Congressional Review Act resolution to repeal the Consumer Financial Protection Bureau’s rule barring medical debt from credit reports.

Why Aren’t Bonds Happier About CPI?

For the 2nd month in a row, the market’s reaction to a CPI/PPI report ended up being less about the report itself and more about its implications for the more highly regarded PCE inflation data. While we have to wait 2 weeks for official word on PCE, the CPI/PPI combination goes a long way toward revealing the outcome. In today’s case, CPI suggested higher PCE inflation, so bonds ended up selling off, albeit modestly, despite core CPI coming in lower than expected. Thursday’s PPI once again has the opportunity to punch above its typical weight for the same reason. 

Econ Data / Events

Core M/M CPI

0.2 vs 0.3  f’cast. 0.5 prev
unrounded 0.2266

Core Y/Y CPI

3.1 vs 3.2 f’cast, 3.3 prev

Market Movement Recap

09:31 AM Weaker overnight and mixed reaction to CPI (mostly ignored). MBS down 1 tick (0.03) and 10yr up 3.6bps at 4.316

12:46 PM MBS up 1 tick (.03) and 10yr up 2.8bps at 4.308

03:41 PM Fairly flat in the afternoon, despite some noise in both directions.  MBS are unchanged and 10yr yields are up 3.6bps at 4.317

Today’s CPI came in lower than expected. That would normally help bonds rally, but they didn’t seem too eager to do that. One explanation is that the components of CPI that have a bearing on PCE suggest PCE will be higher than previously expected. While we don’t usually see PCE move markets as much as CPI, that’s because PCE is much easier to forecast after CPI and PPI come out. As far as the Fed is concerned, PCE has the final say when it comes to measuring progress toward 2% inflation. As such, if today’s CPI says that PCE (2 weeks from now) looks like it will be higher than previously expected, the implication is for bond market weakness as opposed to strength.