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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.

Mortgage rates have moved up over the past 2 days, ultimately hitting the highest levels since February 24th today.  While that sounds somewhat unpleasant or unfortunate, context paints a softer picture.  Specifically, since February 25th, the average top tier 30yr fixed rate has been in a fairly narrow 0.12% range centered on 6.75%. That makes the past 2 weeks the best 2 weeks we’ve seen since early October. Today’s contribution ended up being surprisingly uneventful. Why surprising? Markets were eagerly anticipating the Consumer Price Index (CPI) release this morning. As is always the case these days, CPI stands a good chance to send rates higher or lower at a faster pace than most other economic reports. Today’s CPI showed softer than expected inflation for February and an upward revision for January. Some of the underlying components suggested future inflation readings would be slightly higher than expected. Those counterpoints prevented rates from moving lower despite the apparent victory in the headlines. Looking ahead, tomorrow’s Producer Price Index (PPI) is a similar report, but focused on wholesale inflation as opposed to consumer inflation.  It, too, can have a bearing on the same future inflation data as CPI. Last month, PPI actually had a bigger impact, and it helped push rates back down after CPI pushed them higher. While this certainly doesn’t mean history will repeat itself, it illustrates the possibility of disagreement among these reports. 

The company is a leading player in the primary and secondary markets for government-backed reverse mortgages and also has been developing proprietary products.

The Irvine, California-based firm reported a net loss of $67.5 million in the fourth quarter.