This is Matt Graham with the MBS Live Market Update. Last week was fairly decent for the bond market, even though there was some gradual selling throughout the week. That may not have been the case if it hadn’t been for a very strong move into Monday morning that set a lower starting point for bond yields or a higher starting point for MBS prices. But alas, that was the starting point, and we moved gradually weaker for most of the week, at least through midday on Thursday. Bonds bounced on Tuesday, despite stocks continuing lower and that’s notable because there’s been quite a bit of correlation between stocks and bonds recently and some moments of departure from that correlation, and Tuesday morning was a notable example of that. That said, it didn’t line up very well with any specific economic data or events. So, we’re left to conclude that bonds were either preparing or bracing for the potential impact of the following day’s CPI report, the consumer price index or that it had something to do with making concessionary room for the treasury auction cycle, which is also a thing that analysts like me say, when we’re not sure why the bond market is moving weaker on an auction week, we’ll just have to take people’s word for that when they say it, because there’s not really any way to disprove it. Wednesday morning brought CPI, the week’s ostensible biggest event and there was really not much of a reaction despite CPI coming in stronger than expected or better than expected I should say at the core level 0.2 versus 0.3 month over month something that would normally be good for the bond market but again there wasn’t much of a reaction. Why might that be Increasingly, CPI and PPI, both the consumer and producer price indices, are being traded not as much for their respective headlines and instead more for their impact on PCE inflation. So we have three abbreviations now, CPI, PPI, and PCE. The latter is the more robust inflation report that comes out two weeks after the first two. It’s the one leaned on more heavily by the Fed to track the 2 percent inflation target. and both CPI and PPI have components that directly impact PCE inflation. When those components have a strong bearing on how PCE is going to change, we oftentimes see the bond market trade those components as opposed to the headline levels of CPI and PPI themselves. So that was one reason that Wednesday’s CPI didn’t have a better impact for bonds. The other could be that it’s still very much the middle of that treasury auction process and traders could still be playing it a little bit safe. More evidence for the PCE implication trade came on Thursday morning when PPI came out much stronger than expected. In fact, core month over month producer prices fell to negative 0.1 versus a forecast of positive 0.3 and a previous reading of 0.5. Normally that’s the type of beat in inflation data that would cause a very massive rally in the bond market. Instead, bond sold off a little bit, and the only way to explain that is via that PCE trade, because virtually all of the components inside the PPI data that translate to PCE were higher than expected, or higher than they were previously, or indicating a higher PCE level. Several firms upgraded their estimates for PCE after that data, which is always good confirmation that we’re looking in the right place. All that said, it wasn’t the biggest sell-off in the world, and it was over by about 10 AM. Then weakness in stocks helped bonds start to get back on better footing, and then the passing of the auction cycle for the week helped additional gains. We ultimately ended the day stronger. on Thursday. People may look back on that day and say, Oh, that obviously had to do with the strong PPI data or the lower than expected PPI data, but that would not be accurate. Friday of every day of the previous week. Was the biggest snooze fest very quiet trading, very sideways, very much an inside day with the highs and lows falling well inside the highs and lows of the previous session coming into the current week, we’ve gotten things kicked off with retail sales coming in weaker than expected at the headline, but much stronger than expected for the control group that excludes autos, gas, and building materials that made for a little bit of weakness earlier this morning, but bonds have bounced back. There is not currently any obvious ongoing correlation between stocks and bonds. Although that may come and go throughout the week. The big to do from a scheduled event standpoint is Wednesday afternoon’s Fed announcement. They will not be cutting rates, but markets as always will be scrutinizing the dot plot, which is the way the Fed conveys their estimates or their forecasts or their projections, we should say of the appropriate level of the Fed funds rate at various points in the future for each individual Fed member, something the market cares an awful lot about for reasons unknown, because those things actually always change quite a bit depending on the data and maybe the weather too, we’ll see, but either way, Wednesday afternoon, 2PM Eastern time. That’s when all that drama unfolds. That’s all for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
Matt began as an originator in 2002. He fell in love with the idea of following MBS in real-time but felt that existing products were only scratching the surface. Thus was born MBS Live in 2007, the first-of-its-kind platform with real-time market data/analysis, and live chat with analysts, traders, and originators around the country. He is currently the Founder and CEO of MBSLive!
He’s been covering bond/mortgage markets, writing commentary, alerts, and chatting with the live community every business hour of every business day ever since.
Matt also serves as the Chief of Operations for mortgagenewsdaily.com, where he is one of the industry’s most respected mortgage rate experts, frequently quoted in the media. Mortgage News Daily’s rate index is used as the definitive resource on day-to-day mortgage rate averages.
He lives in the Pacific Northwest with his wife and son where he enjoys skiing, fishing, coaching youth sports, playing the guitar, and more DIY projects/hobbies than he’d care to admit.