This is Matt Graham with the MBS Live Market Update. Last week was fairly boring and potentially with a capital B for the bond market. Despite the fact that we had the CPI Consumer Price Index and PPI Producer Price Index releases and despite the fact that PPI came in much weaker than expected. In fact, on Wednesday morning, producer prices came in at negative 0.1% versus positive 0.3 forecasts and the previous. Reading was revised down from 0.9 to 0.7. That is the first clue as to why markets were able to overlook that. It is a very volatile series and the two month annualized average remains at 3.6%. In other words, if you take the very low reading that we got last week and the still very high reading that we got the month before and extrapolate those two months into an annual figure, that figure would still be 3.6%, which is still fairly high inflation. In addition, the components of PPI that pass through to the more scrutinized PCE inflation numbers suggested PCE. Would see only a modestly beneficial impact from the PPI numbers. Thus, the modestly beneficial rally for the bond market CPI the following day was interesting because the headline monthly number did come out at 0.4 versus 0.3 forecast in a 0.2 previous reading. That in and of itself seems to be. A concern from an inflation standpoint and a concern when it comes to fed rate cut expectations, but the core reading was right on target, 0.3 versus 0.3, even though the unrounded number was almost high enough to get that up to 0.4. Others saving graces within the data. It consisted of the facts that the shelter component drove most of the weakness, and that’s something the market has been able to look past recently because it is assumed to broadly continue to come down. And if inflation were spreading out to be more broad based, that would be more of a concern for fed rate cut expectations, super core inflation, which is core services excluding shelter is one popular category flagged by the Fed and others is having an outsized impact on rate cut expectations. Last month it shot up to 0.481, and in this most recent report out last Thursday. It was down to 0.33, potentially trending in a more rate friendly direction. In any event, CPI day on Thursday did not have any measurable impact on the bond market. Then on Friday, we had a little bit of a technical correction, perhaps rejection of the 4% level. In 10 year treasury yields. Looking back on Thursday, we see multiple bounces right at that 4% level. I’m personally not a big fan of assigning too much significance to technicals as motivating market movement, but in this case it could be a consideration and you could also simply have position squaring heading into the end of the week and ahead of an important week for bonds presently. Why is this week important in a word, the dots. This refers to the dot plot, which is a summary of each Fed member’s view of where the Fed funds rate will probably be given their base case scenarios. While Fed share Powell has downplayed its predictive significance, the market definitely views the dots as a clear window to the Fed’s reaction function to the crop of recent economic data. Given the fact that there has been a significant change in labor market data since the last DOT plot came out, the market is eager to see how the dots evolve in the current release and whether the DOT plot lines up with the market’s expectation for 3 25 bit rate cuts between now and the end of the year. The more it does that, the more rates will be able to remain in a low and possibly lower trajectory. But if the Fed surprises the market in a way that suggests rate cuts are maybe not as possible as the average investor feels, then we could see a bit of a correction back up toward the recent range. The rate cut itself, which is a guarantee on Wednesday, is a non-event fed share house press conference could serve to flesh out the Fed’s reaction function. But it will primarily be a focus on the dot plot. Apart from that, there’s some other economic data this week, but the only significantly interesting report would probably be retail sales tomorrow morning, 8:30 AM Eastern Time. That’s gonna do it 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.