Southeast homeowners affected by the storms last fall submitted a combined over 78,500 flood insurance claims to the National Flood Insurance Program.

North American banks face heightened anti-money laundering scrutiny and a few related variables will determine whether or not this leads to more mortgage sales.

A $1 billion assessment announced Tuesday for California’s FAIR Plan, the state-mandated insurer of last resort, is expected to drive up premiums as companies will likely pass some of the costs onto homeowners.

While Freddie Mac’s weekly survey showed 30-year rates falling, other indicators paint a mixed picture for mortgage lenders and borrowers.

What’s Up With Today’s Paradoxical Bond Rally?

PPI may not be as heavy a hitter as CPI on average, but one could make a case for this week being one of the rare exceptions. Strikingly, PPI managed to HELP bonds despite the core annual number coming in much higher than expected. The catch is that January’s numbers were in line with expectations.  More importantly, the components of the PPI data that flow through to PCE inflation suggested bigger drop than expected when we get that data in 2 weeks (core PCE now seen around 0.25% for January as opposed to 0.35% before PPI). Today’s rally didn’t play out all at once like yesterday’s sell-off.  It gathered momentum heading into and out of the conclusion of this week’s Treasury auction cycle.  Nonetheless, PPI deserves most–if not all–of the credit for turning the tide. 

Econ Data / Events

Core Producer Prices, M/M

0.3 vs 0.3 f’cast
last month revised up to 0.4 from 0.0

Core Annual Producer Prices

3.6 vs 3.6 f’cast, 3.5 prev

Market Movement Recap

09:09 AM Modestly stronger overnight and gaining more ground after AM econ data.  MBS up 6 ticks (.19) and 10yr down 5.8 bps at 4.567

12:54 PM Additional gains into the 30yr bond auction time frame.  MBS up 3/8ths in 5.5 coupons and 10yr down 9.2bps at 4.533

03:09 PM More gains into 3pm, but bouncing a bit since then.  MBS up 13 ticks (.41)

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.