CPI Lived Up To Market Moving Potential And Then Some

For every 14 or 15 times we approach a potential big-ticket market mover with a high degree of anticipation, days like today happen.  In fact, it might be even more rare than that because bonds reacted even more forcefully than the data suggested.  Case in point, Core M/M CPI came in at 0.2 vs 0.2 forecast and 10yr yields quickly dropped by 15bps and never rebounded.  That’s quite something and it either emphasizes the market’s anxiety about getting hit with a double whammy today (after Friday’s jobs report), the favorable composition of the data’s internal components, or the fact that corrections are bigger than they otherwise would be when they follow long-term high yields.  The truth is likely a mix of all 3 factors.  No one’s complaining, but do keep in mind that this can’t singlehandedly change the narrative, even if it can serve as an ingredient in that change.

Econ Data / Events

Monthly Core CPI

0.2 vs 0.2 f’cast, 0.3 prev
unrounded: 0.225 vs 0.240

Annual Core CPI

3.2 vs 3.3 f’cast, 3.3 prev

Market Movement Recap

09:11 AM stronger overnight with additional gains after CPI data.  MBS up half a point and 10yr down 12.3bps at 4.678

12:18 PM Gains holding up nicely.  MBS up 18 ticks (.56) and 10yr down 14bps at 4.661

04:44 PM Remarkable absence of volatility following such a big move in the morning.  MBS up 19 ticks (.59) and 10yr down 14.8bps at 4.655… very little changed for the past 5 hours.

On December 18th, one of the most striking takeaways from Fed Chair Powell’s press conference was the shift in the Fed’s focus from the labor market to inflation data. Said shift was frequently reinforced in subsequent speeches by other Fed members. Traders were left to decide how much they would shift their own playbooks–something that was especially difficult after last week’s big jobs report.  Today’s CPI was arguably less of a departure from forecasts than the jobs report, but the market reaction has been much more pronounced (in a good way).

By focusing solely on 10yr yields, the reaction is just a bit overstated, relative to the jobs report.  If we bring 2yr Treasuries into the mix, we can see that some of the discrepancy is due to curve trading.  The jobs report did more to push short term rates higher whereas the inflation data is doing more to help longer-term rates move lower.

This isn’t as simple as 2yr yields having more in common with Fed rate expectations.  Fed Funds Futures have sort of split the difference, with roughly equal reactions to each piece of data.

The folks here in Austin are sarcastically asking, “Who’s in your wallet?” Hopefully not Jennifer Garner or Samuel L. Jackson. The Consumer Financial Protection Bureau (CFPB… which always has our backs, right?), sued Capital One, N.A., and its parent holding company, Capital One Financial Corp., for “cheating millions of consumers out of more than $2 billion in interest.” “The CFPB alleges that Capital One promised consumers that its flagship ‘360 Savings’ account provided one of the nation’s ‘best’ and ‘highest’ interest rates, but the bank froze the interest rate at a low level while rates rose nationwide. At least IMBs and brokers don’t have to worry about running afoul of that kind of thing. Instead, many lenders here in Texas, and around the nation, are wondering who, or what, is going to bring the FHA into a new century: streamline refis that include escrows, SFR construction loans, having the monthly MI drop if the LTV drops to 75 percent (or after 7.5 years), and answering the question, “If loan quality is higher now than in 2008, why are the LLPAs the same and not diminished?” (Today’s podcast can be found here and this week’s is sponsored by Calque. White-labeled buy-before-you-sell solutions powered by Calque help you increase purchase volume and increase realtor business by helping them differentiate with a better process. With coverage in the 48 contiguous states, what are you waiting for? Hear an interview with Calque’s Michael Bremer and Ruoff’s Clint Morgan on vendor management, product expansion, and what tech offerings to look forward to this year.)

The Federal Housing Administration mortgagee letter finalizes a draft put out for comment in November on the inclusion of rental payments from a boarder.

The finalized rule adds flexibility to the capital rules applied to the Federal Home Loan Banks to help them extend credit to their members.

Financial profiles of borrowers in the coastal areas where insurance coverage is required vary significantly from at-risk homeowners inland, CFPB’s analysis found.

Los Angeles already had a housing affordability crisis before devastating wildfires burned entire neighborhoods to the ground. The disaster is making it worse.

Rocket Companies has unveiled a refreshed logo and announced plans to rename some of its businesses, hinting at more updates set to be revealed on February 9.

The Producer Price Index (PPI) may not be nearly as much of a market mover as the Consumer Price Index (CPI), but it has proven capable of producing logical reactions in the past when it’s come in much higher or lower than expected. Today’s installment was much lower than expected–something that should be good for bonds. While there was a brief, initial rally, it was quickly erased and bonds returned to relatively unchanged levels.

The easiest explanation is that the market is preoccupied with CPI and there’s limited directional correlation on any given individual month.

The deeper explanation is that the PPI components that flow through to consumer inflation didn’t miss the market as much as the headline suggested.

Mortgage rates officially hit the highest levels since May 2024 yesterday, even though the average was almost imperceptibly higher than last Friday’s.  We saw a similarly small move today, but in the opposite direction. In other words, the average rate moved lower by an amount that won’t even have an impact on many of yesterday’s rate quotes. As always, keep in mind that our rate index is an average of multiple lenders and on days with very small changes, some lenders can be noticeably better or worse compared to the previous day. This morning’s economic data featured the Producer Price Index (PPI)–a report that measures inflation at the wholesale level.  It came in at lower levels than expected.  That would normally be good for rates, but it didn’t have much of an impact today.  Tomorrow’s inflation report–the Consumer Price Index (CPI)–is in a different league. If it undershoots forecasts by the same margin, rates would almost certainly move lower.  Conversely, rates would almost certainly rise if inflation overshoots forecasts. There’s no guarantee of rate-friendly data tomorrow simply because today’s inflation report was lower than expected. CPI frequently departs from PPI on any given month, even though the two tend to do the same things over longer time horizons.