What Happened Last Week?
Biggest Rally in Over a Decade After CPI Overdelivers
You may have been tired of hearing just how important Thursday’s CPI would be. But not only did CPI deliver, it OVERDELIVERED (and even that is an inadequate word to capture the grandeur). 10-year yields dropped the most in a single day since 2009. Same story for mortgage rates, which could be an all-time record. But was this rally a bit overdone and at risk of a correction, or confirmation of things to come?
Source: Matthew Graham, Mortgage News Daily 11/10/22)
What’s on the Agenda for this Week?
The three areas that have the greatest ability to impact mortgage backed securities (MBS) backend pricing this week are: (1) Inflation Nation, (2) The Talking Fed and (3) Retail Snails.
(1) Inflation Nation: Last week, there was a major price improvement directly in response to the CPI release. Even though it was a very ugly data series that showed 29 straight monthly increases in inflation, it did show a small move lower in the YOY reading. This week will be the frontend of that equation with the release of the Producer Price Index, and the bond market will be very sensitive to the trend line and headline YOY reading.
(2) The Talking Fed: Both the stock market (DJIA +1000) and MBS (+169) showed major moves upward on speculation that the Fed would have to change their tune based upon one small change in a YOY CPI reading. This week, look for the Fed to try to manage market expectations of (1) a pivot or the timing of a pivot and (2) increasing their target inflation rate to higher than 2%. Here is this week’s schedule:
- 11/14: Brainard, Williams
- 11/15: Cook, Harker
- 11/16: Waller, Williams and ECB President LaGarde
- 11/17: Bostic, Mester, Kashkari, Bowman and Jefferson
(3) Retail Snails: Wednesday’s Retail Sales report will take center stage and will give a good read on the consumer and therefore (via trickledown) the economy.
Taking it to the House
There is a ton of housing related data this week which is not likely to impact MBS pricing that much, but it will be an important gauge on the industry. This week will be the Home Builder’s Index, Housing Starts, Building Permits and Existing Home Sales.
The Talking Fed: Fed Vice Chair Lael Brainard hinted that the Fed could soon slow the pace of its interest rate increases. She told Bloomberg News, “I think it will probably be appropriate soon to move to a slower pace of rate increases.” But she also said, “I think what’s really important to emphasize is we’ve done a lot but we have additional work to do both on raising rates and sustaining restraint to bring inflation down to 2% over time.”
MBS For Sale: The Federal Reserve Bank of NY will sell $30M of MBS on 11/17 and then will sell another $120M on 12/08.
On Deck for Tomorrow: Empire Manufacturing, PPI, Core PPI.