Gradual Weakness All Day And a Quieter Calendar Ahead
Today brought the last of the scheduled economic data until the end of next week. Even then, the data won't be too relevant for at least 2 weeks when the next PCE price index comes out. Ironically, we've always considered Import Price data to be in the "not too relevant" category, but it appears to have challenged that notion today, thanks in large part to the massive gap versus expectations (0.9 vs 0.3). With that, a number usually disregarded as noise was suddenly worth a small bump in forecast for PCE. Initial weakness was modest and it leveled off quickly, but the rest of the day saw a slow, directional leak that left MBS down a quarter point.
Econ Data / Events
Jobless Claims
222k vs 220k f'cast, 232k prev
Philly Fed Index
4.5 vs 8.0 f'cast, 15.5 prev
Import Prices
0.9 vs 0.3 f'cast, 0.6 prev
Building Permits
1.44m vs 1.48m f'cast, 1.467m prev
Housing Starts
1.36m vs 1.42m f'cast, 1.287m prev
Industrial Production
0.0 vs 0.1 f'cast, 0.1 prev
Market Movement Recap
08:35 AM modest losses after data. 10yr still down 0.2 bps on the day at 4.339 and MBS down 2 ticks (.06).
11:01 AM MBS right in line with previous update (down 2 ticks or 0.06) but 10yr now up 1.8bps at 4.358.
02:33 PM Additional weakness now with MBS down roughly a quarter point on the day and 10yr up 3.6bps at 4.376
04:41 PM Still near the weakest levels with MBS and Treasuries unchanged versus the previous update.
On the average day in the mortgage market, the average lender will offer the same mortgage rate terms for the entire day. It's only when the underlying bond market moves enough that lenders will make mid-day adjustments. Today was one of those days and it involved a reprice to slightly higher levels. For now, this is still fairly inconsequential. Apart from yesterday (or this morning, for that matter), the average lender would still be at the lowest levels since early April. Instead of being a hair below 7%, the average top tier conventional 30yr fixed is now a hair above. Today's bond market weakness began after this morning's Import Price data came out much higher than expected, but it continued at a gradual pace through the rest of the day. This could suggest that the stronger vibes from Wednesday's inflation data have run their course and the rate market will now consolidate as opposed to make additional improvements.
The latest data on new residential construction from the U.S. Census Bureau paints a somewhat mixed picture of the housing market. While housing completions surged in April, Housing starts only increased modestly and building permits declined both building permits slipped to the lowest level since last summer. The following bullet points break down the numbers in seasonally adjusted annual rates for the 3 phases of construction:
Building Permits
1.44 million versus 1.48 million forecast and 1.467 last month
Of that, 976k were single family permits and 408k were 5+ units
Housing Starts (breaking ground phase)
1.36 million versus 1.42 million forecast and 1.29 million last month
last month revised down from 1.32 million
Of that, 1.031 million were single family and 322k were 5+
Housing Completions
1.62 million versus 1.495 million last month, a 10.3 percent increase
Of that, 1.092 were single family and 516k were 5+
We could attempt to over-analyze the month to month changes in this notoriously noisy data series, but in the bigger picture, permits and starts have been flat for more than a year while completions continue to improve. Zooming out a bit more, the takeaway isn't much different, but it adds context from the previous highs and also shows starts and permits remaining near pre-covid highs.
It's the day after the CPI data and thus begins a concerted effort over the next few weeks to avoid compiling every piece of commentary as a simple countdown to the next CPI. To be fair, we will avoid some of that temptation by counting down to the first week of June with its more robust economic calendar and by the time we get through the jobs report on June 7th, it will be perfectly logical to move on to CPI anticipation. But for now, Memorial Day market closures may as well start early.
Bonds are little-changed from yesterday with modest gains turning into modest losses after the 8:30am econ data. No one should read anything into the level of weakness seen so far today as it leaves trading levels easily inside yesterday's post-CPI range. If there's one report to blame for the push-back this morning, it would have to be Import Prices. That's a break from the norm (it essentially never has an impact), but this one was exceptionally far from the forecast at 0.9 vs 0.3.
Attendees of next week’s MBA Secondary conference can look forward to… A giant hot dog in Times Square that spits out confetti at high noon. (Keep your risqué comments to yourself please.) They can obviously look forward to much more at the actual conference, including information about the economy, regulators, and seeing what the Agencies and aggregators are up to in terms of products. Every client is important, and originators want a full product suite from their companies and vendors. (The current STRATMOR blog is titled, “Down Payment Assistance Programs Helpful But Not a Universal Remedy.”) For good news, homeowner equity has hit almost $17 trillion, as values in March hit a historic all-time high according to a report from Intercontinental Exchange. But looking at units this year (a better measure than the estimated $1.5-2 trillion) the MBA expects the lowest production in decades. If recent conferences are any indication, look forward to attendance being down, but spirited and with a good “vibe.” (Found here, this week’s podcasts are sponsored by LoanCare. The mortgage subservicer is known for delivering superior customer experience through personalization and convenience. Its award-winning portfolio management tool, LoanCare Analytics, supports MSR investors with a focus on customer engagement, liquidity, and credit risk. Hear an interview between JVM Lending’s Jay Voorhees and Robbie on thoughts for the future of mortgage origination.) Lender and Broker Software, Products, and Services
Like The Last CPI Never Even Happened
The much anticipated CPI data was perfectly in line with expectations of 0.3% month over month at the core level. That's a far cry from the 0.17% needed to sustain a 2.0% annual inflation target on average, but by avoiding another upside surprise, it was enough for bond traders today. It also surely didn't hurt that Retail Sales (which had added insult to injury last month) came in much lower than forecast (0.0 vs 0.4) with last month's stellar 0.7% reading also being revised down to 0.6. Bonds rallied sharply at first, and then gradually into the afternoon. As if by magic, 10yr yields hit the 3pm close at the same levels seen before the April 10th CPI data... like it never even happened...
Econ Data / Events
Core Month Over Month CPI
0.3 vs 0.3 f'cast, 0.4 prev
Core Annual CPI
3.6 vs 3.6 f'cast, 3.8 prev
Retail Sales
0.0 vs 0.4 f'cast, 0.6 prev
Market Movement Recap
08:39 AM Stronger after data with 10yr down 6bps at 4.38 and MBS up nearly 3/8ths
10:53 AM Remarkably calm in new, stronger range. 10yr down 6.5bps at 4.374. MBS up 10 ticks (.31).
01:01 PM Steady gains since 10am. MBS up 14 ticks (.44) and 10yr down 9.4bps at 4.345.
03:01 PM Still fairly flat, just off the best levels. MBS up 3/8ths and 10yr yields down 8.8bps at 4.351
If it feels like we've been harping on the prospects for rate volatility in response to today's inflation data for several weeks (and we have), today is why. The Consumer Price Index (CPI) is the biggest reliable source of momentum for interest rates when it comes to scheduled data--big enough that the results can come in right in line with forecasts and still have a big impact. Indeed, today's results were right in line with forecasts. In month over month terms, core inflation was 0.3% and annual inflation was 3.6%. The Fed wants those numbers at 0.1-0.2 in monthly terms and 2.0% annually in order to be more confident about rate cuts. The annual number wouldn't need to hit 2.0% as long as monthly numbers suggested we were well on our way. And again, today's monthly number only suggested 3.6% (0.3 x 12). Despite being almost twice as brisk as desired, the 0.3% rate of monthly core inflation was apparently a relief for bond traders who quickly began pushing rates lower. Mortgage rates are based on mortgage-specific bonds that correlate substantially with US Treasuries. Other economic data helped the cause with Retail Sales coming in unchanged for April versus forecasts calling for a 0.4% increase. Taken together, the as-expected inflation data and weaker retail sales suggest cooler inflation pressure relative to Q1's data--something all fans of low rates were hoping to see. Mortgage Lenders were able to drop their average top tier conventional 30yr fixed rate to 6.99% from 7.11% yesterday.
Builders’ confidence in the new home market retreated this month , the first decline since last November. The National Association of Home Builders (NAHB) reports that the NAHB/Wells Fargo Housing Market Index (HMI) lost 6 points from its April level, falling to 45. Derived from a monthly survey that NAHB has been conducting for more than 35 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor” and asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” A score above 50 for the HMI or any of its components indicates that more builders view sales conditions as good than poor. All three HMI component indices declined decisively in May. The HMI index charting current sales conditions in May fell 6 points to 51, the component measuring sales expectations in the next six months fell 9 points to 51 and the gauge charting traffic of prospective buyers declined 4 points to 30. NAHB economist Robert Dietz stated that the reason for the decline is the persistently high mortgage interest rates which have remained above 7 percent for the last four weeks. Dietz said, “The market has slowed since mortgage rates increased and this has pushed many potential buyers back to the sidelines. A lack of progress on reducing inflation pushed long-term interest rates higher in the first quarter and this is acting as a drag on builder sentiment. The last leg in the inflation fight is to reduce shelter inflation, and this can only occur if builders are able to construct more attainable, affordable housing.”
Misconceptions and misunderstandings… Capital markets folks at the MBA conference next week should know that The Naked Cowboy in Times Square is not really naked. Soon after his presidency, Jimmy Carter (who’s been on hospice care for 15 months) gave a speech at a Japanese college and told a joke. To his surprise, the Japanese interpreter’s version was much shorter than the actual joke as he said it, and the entire audience burst out laughing. It turns out that the interpreter couldn’t translate the joke, and admitted to telling the audience, “President Carter told a funny story. Everyone must laugh.” One big misconception that seems to continue in lending is that home buyers still need to come up with a 20 percent down payment. A misconception in our biz is a focus on volume. It should be on units: underwriters and LOs do X units per day or month, not a dollar volume. The MBA expects $1.5 or $2 trillion this year, but the units are expected to be the lowest in decades. Wrapping up on misconceptions, out in California, Etienne Constable was told to build a 6-foot fence to hide the boat from view of his neighbors… But he got an image of the boat painted onto the fence. (Found here, this week’s podcasts are sponsored by LoanCare. The mortgage subservicer is known for delivering superior customer experience through personalization and convenience. Its award-winning portfolio management tool, LoanCare Analytics, supports MSR investors with a focus on customer engagement, liquidity, and credit risk. Hear an interview with Loan Care’s Kevin Cooke and Eric Seabrook on a variety of topics germane to servicing, from prominent players in the MSR market and implications of fewer Fed rate cuts, to HELOC and second lien servicing.)
First off: the bond market rallied after the CPI data came out and remains in much stronger territory vs yesterday. That said, the more context we add, the more underwhelming today becomes. As we advised yesterday, even an "as-expected" CPI would result in bond market volatility and that's what we're seeing so far. Thankfully, the volatility is in favor of lower rates. This would have been the case without the weaker retail sales data, but that's certainly adding to the gains. With 10yr yields down only 6bps in the 10am hour, this is shaping up to be one of the least volatile potential reactions to today's data.
To emphasize the underwhelming volatility, we need only look back two weeks to the NFP reaction.
Last but not least, consider that the April 10th CPI reaction was nearly twice as big as the NFP reaction and in much higher volume.
