The good news in the Consumer Price Index report has not carried over to the 10-year Treasury yield and thus mortgage rates, Freddie Mac found.

Stocks Save Bonds From Modest Losses

You won’t always be able to count on the market dynamics we’ve seen over the past few weeks, but during that time, they’ve been pretty reliable.  Specifically, steep losses in stocks have been helping the bond market more often than not, and today was another example. Bonds started out in slightly weaker territory after the PPI data suggested higher PCE inflation.  PCE doesn’t come out for 2 weeks, and PPI’s top line numbers were good, but markets care more about PCE, hence the paradoxical reaction. Stocks began swooning in earnest in the 11am hour, and bond yields followed suit. After topping out at 4.35%, 10yr yields fell to 4.25+ before leveling off. 

Econ Data / Events

Monthly Core PPI

-0.1 vs 0.3 f’cast, 0.5 prev

Yearly Core PPI

3.4 vs 3.5 f’cast, 3.8 prev

Jobless Claims

220k vs 225k f’cast, 222 prev

Market Movement Recap

08:44 AM Slightly weaker overnight with additional losses after paradoxical PPI suggests weaker PCE.  MBS down and eighth and 10yr up 3.3bps at 4.344

11:28 AM Bonds moving into positive territory. No obvious motivations apart from stock market weakness and/or technicals. 10yr down almost 1bp at 4.305 and MBS unchanged. 

02:54 PM Rally continued with stock selling and bounced with stocks.  MBS up 2 ticks (.06) and 10yr down 3.6bps at 4.275

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.  

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