Bonds Eventually Pass on Decisive Reaction to Tuesday's Data
Right at the 8:30am release time, bonds rallied on core CPI almost perfectly hitting unrounded forecasts (.32 vs .31). Additionally, the 2.7% vs 2.8% annual headline number was another step in the right direction. As markets digested the internals, the "yeah but" trading emerged. "Yeah buts" included supercore CPI (core services excluding housing) rising to 0.481 vs 0.212 month-over-month and evidence of the tariff impact via the highest annual core goods inflation since June 2023. So on one hand, declines in housing related inflation are finally helping keep the number down while other categories are pushing back in the other direction, keeping the broader numbers a bit stubborn. The mixed data and mixed market reaction place even more emphasis on the next jobs report when it comes to informing the next big move for rates.
Econ Data / Events
m/m CORE CPI (Jul)
0.3% vs 0.3% f'cast, prev 0.2%
m/m Headline CPI (Jul)
0.2% vs 0.2% f'cast, prev 0.3%
y/y CORE CPI (Jul)
3.1% vs 3% f'cast, prev 2.9%
y/y Headline CPI (Jul)
2.7% vs 2.8% f'cast, prev 2.7%
Market Movement Recap
09:30 AM Initial rally followed by a sell-off after CPI. 10yr up 1.7bps at 4.302. MBS still 3 ticks (.09) higher on the day, but post-CPI gains are erased.
10:50 AM Off the weakest levels. 10yr up 1.3bps at 4.296 and MBS up an eighth of a point.
01:49 PM Turning out to be fairly uneventful. MBS up 5 ticks (.16) and 10yr up 0.7bps at 4.292
04:30 PM Strongest levels since the post-CPI selling. MBS up 6 ticks (.19) and 10yr nearly unchanged at 4.287
Pundits, politicians, and everyone else can continue to assume that mortgage rates will respond to changes to the Fed Funds Rate. Meanwhile the bonds that actually dictate mortgage pricing will continue responding to the most important economic reports. The two biggest examples are the monthly jobs report and today's release of the Consumer Price Index (CPI). To be fair to those who are overly-focused on the Fed, there is a correlation between this data and the Fed's decision-making process. In other words, today's rates were at risk of moving higher or lower for the same reasons that the Fed might be more or less likely to cut rates in September. The Fed attempts to balance unemployment and inflation, in not so many words. Today's CPI showed that inflation has yet to fall decisively enough to guarantee a rate cut. On the other hand, it didn't rise enough to take a rate cut off the table. In short, CPI was mixed. Some components showed tariff impacts and a costlier services sector. Other components showed ongoing softening in major categories such as housing-related expenses. The odds of a Fed rate cut actually improved for September. Shorter-term bonds also improved (no surprise, as they are highly correlated with Fed rate expectations). But longer-term bonds (which includes the bonds that dictate mortgage rates) held steady. When this is the case, mortgage rates will almost always be roughly unchanged on the day.
“Nothing refreshes my memory about what I need at the grocery store like coming home from the grocery store.” Remember adjustable-rate mortgages? Here at the California MBA’s Western Secondary, talk in the hallways is about memories of how, in the past, just because the Fed changes short-term rates doesn’t mean long-term rates move. Put another way, short-term rates impacting adjustable-rate mortgages may improve while 30-year mortgage rates barely budge. It will be one of the topics in today’s episode of Capital Markets Wrap at 3PM ET. The panel delves into the increase in ARM volume, anticipated IPOs of Fannie Mae and Freddie Mac, and discusses how upcoming changes at the Federal Reserve could shape future policy. They'll also highlight the significance of the September Fed meeting and share takeaways from the Western Secondary conference. Yes, Bill Ackman, who controls a large block of Freddie & Fannie stock and who has the President’s ear, not only wants another issuance of stock but also to merge F&F. Will borrowers really be helped? Our business continues to watch what could be the likely resolution that will mark the final and most lucrative chapter of the 2008 financial crisis: a successful recapitalization and return to private ownership of Fannie Mae, to the hoped-for benefit of taxpayers, homeowners, and shareholders alike. (Today’s podcast can be found here and this week’s is sponsored by ICE. By seamlessly integrating best-in-class solutions, ICE optimizes every stage of the loan life cycle, setting the standard for innovation, artificial intelligence, efficiency, and scalability, and defining the future of homeownership. Today’s has interview with ICE’s Matt Dowd on the borrower decision-making process and strategies for guiding them from lead generation to closing, including how balancing automation with human touchpoints creates a seamless, trust-building experience.)
There's something for everyone in this morning's CPI data. The monthly headline was on target at 0.2 vs 0.2. Same story for the core at 0.3 vs 0.3. Bonds are just a hair stronger, but it's hard to make a case that they should be based on other internals:
The unrounded monthly core was 0.322 versus the median big bank forecast at 0.31
Supercore (core CPI excluding housing) was 0.481 vs 0.212 previously
Core goods (tariff sensitive) is now 1.2% year over year - highest since June 2023
All these bullet points argue for bonds to be selling off today and likely justify the backpedaling in the initial rally. Bonds are still modestly green on the day, but right in line with yesterday's range. It wouldn't be a surprise to see gains continue to erode as markets digest the implications.
Bonds Mostly Steady Ahead of CPI
Treasuries outperformed MBS just slightly today, but both were close enough to unchanged to argue against any excess analytical effort. In general, bonds took their last major cue from the jobs report earlier in the month and have been mostly sideways since then. That brings us to Tuesday morning's CPI which is the only true top tier data of the week and the only report that can occasionally hold a candle to the jobs report in terms of volatility potential. As with last month, the headline numbers don't necessarily tell the story. Traders will quickly be looking to sort out tariff-impacted categories from the rest of the data.
Market Movement Recap
09:32 AM Sideways to slightly stronger overnight. MBS unchanged and 10yr down 0.6bps at 4.276
12:25 PM strongest levels in 10yr, down 2.1bps at 4.261. MBS unchanged.
02:17 PM bouncing back a bit now. MBS down 1 tick (0.03) and 10yr down 1bp at 4.272
Watching Rates
Check our some recent articles and posts about current rates.
Pundits, politicians, and everyone else can continue to assume that mortgage rates will respond to changes to the Fed Funds Rate. Meanwhile the bonds that actually dictate mortgage pricing will continue responding to the most important economic reports. The two biggest examples are the monthly jobs report and today's release of the Consumer Price Index (CPI). To be fair to those who are overly-focused on the Fed, there is a correlation between this data and the Fed's decision-making process. In other words, today's rates were at risk of moving higher or lower for the same reasons that the Fed might be more or less likely to cut rates in September. The Fed attempts to balance unemployment and inflation, in not so many words. Today's CPI showed that inflation has yet to fall decisively enough to guarantee a rate cut. On the other hand, it didn't rise enough to take a rate cut off the table. In short, CPI was mixed. Some components showed tariff impacts and a costlier services sector. Other components showed ongoing softening in major categories such as housing-related expenses. The odds of a Fed rate cut actually improved for September. Shorter-term bonds also improved (no surprise, as they are highly correlated with Fed rate expectations). But longer-term bonds (which includes the bonds that dictate mortgage rates) held steady. When this is the case, mortgage rates will almost always be roughly unchanged on the day.
The average top tier 30yr fixed rate held exceptionally steady last week after moving just a bit lower over the weekend. By comparison, today's rates are much closer to Friday's latest levels and still very close to the lowest we've seen since October, 2024. If the two key economic considerations for interest rates are jobs and inflation, the two key economic reports are the jobs report seen earlier this month and the Consumer Price Index which comes out tomorrow morning. It's often repeated that the PCE Price Index is a preferable gauge of inflation, but CPI comes out 2 weeks earlier and thus gets most of the market's attention. Just like last month, market participants are watching to see the extent of tariff-driven inflation in tomorrow's data. If it contributes to a higher-than-expected result, we'll likely see some upward pressure on rates. Notably, traders are already expecting an increase over last month, so it won't be "news" to interest rates if inflation is merely higher (the expectation is baked-in to current levels). Bottom line, volatility potential is higher tomorrow morning due to the inflation data and there's no way to know if it will help or hurt until the market is already reacting.
Mortgage rates finally moved in a slightly more noticeable direction today, but the change was still inconsequential in the bigger picture. The average 30yr fixed rate in our index edged up a mere 2 hundredths of a percent from 6.55% to 6.57%, exactly matching the levels seen on August 6th. This leaves rates in the same low range they’ve occupied all week. This week’s stability follows last Friday’s jobs report, which pushed bond yields—and by extension, rates—sharply lower. Since then, daily market movements have been too small to force meaningful lender changes. Even with today’s tiny bump, top tier scenarios remain in the mid-6% range. Next week brings far greater potential for movement. Tuesday’s Consumer Price Index will provide a critical update on inflation and may shed more light on how recent tariff changes are impacting prices. Several Federal Reserve officials are also scheduled to speak, offering an opportunity to gauge whether last week’s weaker jobs data has shifted their willingness to cut rates. Between these two factors, the calm we’ve seen this week could give way to a much more volatile landscape in the days ahead.
Mortgage rates have barely budged after Monday with the day-over-day change failing to exceed 0.02% on any given day. But today's budging happened to bring the average 30yr fixed rate to another 10-month low. Lenders are in the mid 6% range for top tier scenarios. Economic data is one of the common influences for the bonds that underly rate movement. Today's only somewhat significant report was the weekly jobless claims data. It would have needed to fall very far from forecasts in order to have a big impact. While it was higher than expected, the "miss" was too small to matter. Today's improvement has more to do with yesterday's late day gains in the bond market. Today's trading has erased those gains, but the market hasn't moved enough for most lenders to go to the trouble of changing their rates. The implication is that tomorrow morning's rates would be just a hair higher if the bond market held perfectly steady overnight.
