There aren’t many scheduled economic reports that are as hotly anticipated as was today’s Consumer Price Index (CPI). The market’s reaction more than validated the anticipation. What does all this mean for rates? Inflation is always an important consideration for interest rates. Higher inflation means higher rates, all other things being equal and 2022 has seen the biggest spike in decades to the highest inflation levels since the 80s and the highest mortgage rates in at least 20 years. The market and consumers have been waiting for some sign of relief when it comes to rates. Rates, in turn, have been waiting for some sign of relief on inflation. CPI is the most heavily traded inflation report. If there were only one place to receive an update on the fight against inflation each month, CPI would be it. For these reasons, it was no surprise that rates surged lower on November 10th when CPI finally suggested a meaningful shift toward lower inflation levels. But that was only one report and we’d seen another false start a few months prior that cautioned against early celebration. And so it fell to today’s CPI data to confirm or reject the case presented back on November 10th. By coming in lower than the November 10th data and also lower than the median economist’s forecast, the confirmation was essentially provided, thus paving the way for today’s sharp drop in rates. There are a few “yeah buts.” The first is/was that the improvement versus the previous month and the forecast was only one tenth of one percent in monthly terms–perhaps not compelling enough to put the inflation anxiety to bed. The second is that the market still has one other big hurdle to clear this week in the form of tomorrow’s Fed announcement.
Source: Mortgage News Daily
CPI Reaction Lives Up To The Hype. Fed on Deck
On most any other day, if MBS are going out the door with a 5/8ths of a point rally and 10yr yields are down 10bps, it’s been a very good day. To be fair, it has been a great day for the bond market, but a majority of mortgage lenders repriced for the worse at least once. Why? Markets were so anxious to digest and react to the CPI data that the rally got ahead of itself out of the gate. CPI beat forecasts by 0.1%. That’s worth a lot in this environment, but traders are justified to question whether it’s worth the rally seen this morning (MBS up well over a point and 10yr yields down roughly 20bps)–especially with a rather important Fed announcement, press conference, and dot plot coming out on Wednesday afternoon.
Econ Data / Events
Monthly core CPI
0.2 vs 0.3 f’cast, 0.3 prev
Monthly Headline CPI
0.1 vs 0.3 f’cast, 0.4 prev
Core Annual CPI
6.0 v 6.1 f’cast, 6.3 prev
Annual Headline CPI
7.1 vs 7.3 f’cast, 7.7 prev
Market Movement Recap
08:56 AM Big rally after CPI comes in cooler. 10yr down 14bps at 3.48. MBS up more than 3/4 in 5.0 coupons, but just over half a point in 5.5 coupons.
10:50 AM Dialing back from the highs now with MBS down roughly 3/8ths but still up about 3/4ths on the day. 10yr yield still down almost 15bps at 3.47, but up from lows of 3.42.
01:11 PM Weaker after the 30yr bond auction, but still nicely stronger on the day. MBS up roughly half a point but down more than half a point from the highs. 10yr yields down almost 12bps but up 8bps from the lows (currently 3.50%).
03:36 PM Fairly sideways and drifty for the past few hours. MBS recovered a bit, now up a bit more than half a point. 10yr yields near post-data highs of 3.516, but still down 10bps on the day.
Source: Mortgage News Daily
You can go back and research decades of Consumer Price Index reports to compare the size of the market movement relative to the size of the beat/miss vs forecasts and you will never find a day like today–at least as far as the first hour of the reaction is concerned. For a measly beat of 0.1% (core monthly CPI was 0.2 vs 0.3 f’cast and 0.3 prev) the market is partying hard–both stocks and bonds–even if not quite as hard as the last CPI.
MBS are doing even better than Treasuries relative to their December 7th levels. This is due to the shorter duration associated with MBS combined with the outperformance of the short end of the yield curve. In other words, 2-7yr yields are down more than 20bps while 10yr yields are “only” down around 16bps, and MBS tend to last 4-7 years on average, so their movement should align with that section of the yield curve, all other things being equal.
Why would shorter-duration Treasuries be doing better than the long end? First off, the long end has already anticipated the economic cooling likely to result from aggressive Fed rate hikes. A 10yr yield can price in movement over 10 years whereas a 2yr yield is heavily dependent on the Fed Funds Rate outlook (which is infinitely more predictable over a 2 year time frame than, a 10 year time frame). As such, the implications for the Fed’s rate hike outlook have instantly benefited the shorter-dated Treasury yields more than the longest end of the curve.
As for our favorite 10yr benchmark, they’re still well within the prevailing range of the past 2 weeks.
This could also be a factor of the “modicum of restraint” expected in advance of tomorrow’s Fed events. A friendly enough Fed could easily break the range, but we have our doubts as to how much fuel the Fed will want to add to the fire. If anything, the Fed is more likely to try to temper the exuberance because the exuberance is counterproductive to the Fed’s goals.
Source: Mortgage News Daily
The Buffalo Springfield sang, “There’s something happening here… But what it is ain’t exactly clear.” Those were historical times, and a reminder that things are always changing… In Whole Foods the other day I overheard a little girl speaking to another little girl (both in yoga pants) saying, “I’m vegan; I don’t eat candy from animal pinatas.” What the heck, that’s the focus now? For something a little more common sense, and relevant, the current blog on the STRATMOR website is, “The Secondary Market’s Focus.” Certainly the goals of the Federal Reserve will be a topic this Thursday at 2PM ET when the MBA’s fabled chief economist Mike Fratantoni and I whilst we talk shop for 2023 with Sales Boomerang and Mortgage Coach. Few stones left unturned! (Today’s podcast is sponsored by Appraisal Logistics, a full-service AMC licensed in all 50 states. AIM-Port’s robust integrations, custom automations, and granular reporting tools are delivering gains in efficiency and cost savings to lenders across the country. Today’s features interview with ICE Mortgage Technology’s Chris McEntee on top-of-mind items for 2023.) Lender and Broker Software and Services 70% of originators attending our Deep Dive webinar series have not closed a non-QM loan in the past 12 months. Is that because your referral sources don’t know about non-QM? That makes it more important than ever to choose the right non-QM lender. Angel Oak remains fully committed to the non-QM sector as account executives from Angel Oak Mortgage Solutions are ready and able to assist you with everything from structuring deals to helping you market non-QM to your referral partners. Click the link to view a testimonial from broker, Mario Galdos at Triton Group at Legacy Mutual Mortgage, who recently hosted a presentation to educate his realtors on Non-QM.
Source: Mortgage News Daily
The week began in fairly uneventful fashion for mortgage rates, at least in the bigger picture. In the smaller picture, there was a modicum of drama as the average lender was compelled to raise costs slightly in the middle of the day due to deteriorating market conditions. But those changes pale in comparison to the volatility that may be seen in the coming days as the market digests the long-awaited Consumer Price Index (CPI) tomorrow morning. Then a day later, we’ll get the next rate hike from the Fed–likely a bit smaller than the previous hike–as well as the quarterly update on the Fed’s rate hike outlook. The Fed festivities will end with a press conference with Fed Chair Powell, which will give him a chance to clarify any overly-presumptuous reaction to the forecasts or the announcement itself. The last time Powell spoke qualitatively about the Fed’s policy outlook, the market cheered what they saw as a softening in the Fed’s stance. Indeed, many Fed speakers agree it’s time to soften, but not time to become soft. Instead, they want to continue hiking rates, just at a slightly slower pace. From there, they’ve been unified in calling for rates to remain at the ceiling levels as long as possible. It would take a big, sustained drop in inflation for that to change. Both the market and the Fed will take a big cue from tomorrow morning’s CPI data when it comes to assessing the prospects for a drop in inflation. This one report isn’t enough to singlehandedly change the narrative, but it can provide a big push in one direction or the other. Bottom line, the last CPI report was responsible for the biggest single-day drop in mortgage rates on record. Tomorrow’s CPI offers a chance to validate or push back against those conclusions. That doesn’t mean it’ll be another record setting day, but there’s every chance for it to see some very big movement.
Source: Mortgage News Daily
Bonds Give up Gains After Bumpy Auctions
Amid and absence of any relevant economic data, bonds were forced to focus on the 3 and 10yr Treasury auctions for guidance. But the only guidance offered was toward the absence of any willing buyers ahead of the big risk events of the next two days. Both auctions went poorly, contributing to upward pressure on yields at 11:30 and again at 1pm. If anything, 10yr yields held their ground fairly well considering the auction results. MBS held their ground even better, ultimately clawing their way back to positive territory after being down nearly a quarter point at the weakest levels. None of today’s volatility is remotely relevant in the bigger picture. All eyes remain on tomorrow’s CPI results and the Fed announcement that follows just over 24 hours later.
Econ Data / Events
No significant econ data
Market Movement Recap
09:01 AM Stronger at the start of the overnight session amid a risk-off trade on covid news in China. Some additional buying in Europe. 10yr down 5.7bps at 3.529. MBS up a quarter point but possibly more by the time liquidity improves.
11:08 AM Some selling pressure at 10am. 10yr down only 1.3bps now at 3.573, the highest of the domestic session. MBS are up only 3 ticks (.09) now.
01:04 PM More weakness after 10yr Treasury auction. MBS down almost a quarter point. 10yr up 4.2 bps at 3.628.
03:38 PM Decent recovery for MBS since the Treasury auction, now back to ‘unchanged’ on the day. 10yr yields are still up, but now only 2.8bps at 3.613.
Source: Mortgage News Daily
It’s been more than a month since the last CPI report sent mortgage rates lower at the fastest single-day pace on record. Since then, apart from one interesting reaction to Powell’s speech two weeks ago, the main order of business has been to wait for the next CPI report and the Fed announcement that would follow a day later. As the new week begins, we’re a mere 24 hours away. That makes today a placeholder of the highest order. Volatility is possible, especially after the 1pm 10yr Treasury auction, but it pales in comparison to what tomorrow may bring.
To emphasize just how anxious and conflicted the market is heading into this week, it’s worth checking in with Fed Funds Futures to see just how sideways they’ve been since the last major spike in mid October. Both the June and March meetings are seen at the same 4.875% level since then with a few departures on either side of that line. Notably though, the departures have been smaller and smaller.
Meanwhile, the longer end of the yield curve has been doing more to rally as it senses the end may be near for the Fed’s cycle of aggressive inflation fighting (note: 4.875 implies another 50, 25, 25 for the next 3 Fed meetings, so “near” is a relative term).
Source: Mortgage News Daily
My cat Myrtle has toys and games, namely the end of a shoelace, a ping pong ball, and an occasional bout with the light from a laser pointer. Humans have toys too, and here are the top ones from the year you were born. (More fun to look at the years when you’re 5 or 8.) Some of those are big bucks now, speaking of which, everyone out there is trying to save money. Here’s one way: for loan officers requiring continuing education, you only have a couple weeks to complete your 2022 CE classes. If your company is a Lenders One Member, your classes are free! (No, this isn’t a paid ad; contact Tricia Migliazzo for information.) And this may be on the test: The six criteria that make up the completed mortgage loan application are: A – Address of the subject property, L – Loan amount requested, I – Income of applicant, E – Estimated value of mortgage loan application, N – Names of borrowers, S – Social Security Number. There is your acronym: ALIENS. And only when you have ALIENS do you have a completed mortgage loan application. And if you have TILA or RESPA questions, the CFPB’s FAQ site is as good a place to start as any. (Today’s podcast is sponsored by Appraisal Logistics, a full-service AMC licensed in all 50 states. AIM-Port’s robust integrations, custom automations, and granular reporting tools are delivering gains in efficiency and cost savings to lenders across the country. Today’s features an interview with Adam Boyd, Head of Home Equity Lending at Citizens Bank, on the growing popularity of the HELOC market.)
Source: Mortgage News Daily
Tuesday December 13th is the day many people have been waiting for ever since Thursday November 10th. What do those two days have in common? They each mark the monthly release of the Consumer Price Index, the official inflation data responsible for some of 2022’s wildest trading days. Wild trading days aren’t just for traders. They have a big impact on mortgage rates, not to mention bigger picture impacts. For instance, if a wild trading day were to ensue from a higher reading on inflation, it would imply more restrictive policies from the Federal Reserve. That’s something that can shape entire economic cycles, potentially hastening the recession that some market-watchers expect in 2023. In the case of December 13th, it makes a lot of sense to worry about the implications for Fed policy. The Fed releases its next statement the very next day! It’s a near certainty that the Fed will hike rates by 0.50%, a 0.25% decrease from the last hike in early November. Markets won’t be reacting to that as much as the info the Fed publishes alongside the rate hike. Of specific concern is the proverbial “dot plot.” This is a reference to the format of the Fed’s forward-looking rate forecasts, published in dot plot format showing each Fed member’s thoughts. The “dots,” as they’re also called, frequently have the biggest impact on financial markets on the days when they come out (only 4 of the 8 Fed meetings per year).
Source: Mortgage News Daily
Retreat Into Recent Rate Range Continues
The opening commentary is surprisingly similar to the closing commentary. Bonds were already pushing back into their prevailing range with 3.45 or 3.50% as the floor for 10yr yields, depending on your preference. This morning’s data provided an unfriendly nudge in the same direction. MBS outperformed with Treasuries not only anxious about early auctions next week, but also in curve steepening mode (i.e. 2yr yields only rose 3bps whereas 10s rose almost 10bps). All of the movement was/is small potatoes compared to what we will likely see next week after CPI on Tuesday and the Fed on Wednesday.
Econ Data / Events
Monthly Core PPI
0.4 vs 0.2 f’cast, 0.1 prev
Annual PPI
7.4 vs 7.2 f’cast
Annual Core PPI
6.2 vs 5.9 f’cast, 6.8 prev
Market Movement Recap
08:35 AM Slightly stronger overnight, but moving into weaker territory after PPI came in hotter. MBS down 1-2 ticks (0.03-0.06) and 10yr yield up 2.3 bps at 3.512.
10:26 AM Additional weakness after Consumer Sentiment data. 10yr up almost 7bps at 3.556. MBS down just under a quarter point, but still illiquid (i.e. losses might not be quite that big by the time liquidity improves).
01:48 PM Fairly flat at weaker levels. MBS down an eighth and 10yr yields still up 7bps at 3.556
05:12 PM Just a bit more weakness into the close. Treasuries seem anxious about next week’s early auction cycle with 10s up almost 10bps at 3.586. MBS are still only down about a quarter point at the close.
Source: Mortgage News Daily
