Friday – July 12, 2024

Happy Friday!  UMBS are up 16 bps on the open.  Stock Futures are Flat.

Core PPI M/M = 0.4 vs 0.2 f’cast

last month revised to 0.3 from 0.0

Core Annual PPI = 3.0 vs 2.5 f’cast,       [2.3 prev]

• The jump was almost exclusively related to final demand trade services, which captures retailer margins.

Thankfully, PPI is not in the same league as CPI.  If it were, bonds would be tanking a lot harder right now.  As it stands, we’re only seeing a small shift from modest overnight gains to modest AM losses

After Yesterday’s CPI release, investors have priced in a 90% probability of a rate cut in September, however, this morning’s PPI data could but a damper on that metric. The PPI is a measure of prices that producers can get for their goods and services.

The Producer Price Index (PPI) introduced a brief but disconcerting threat to this week’s relative level of triumph (courtesy of yesterday’s CPI) by suggesting a big, unexpected surge in core inflation at the wholesale level.  Bonds initially panicked, but quickly got back on track and never looked back.  Thankfully, the components behind the PPI surge are not the same components that would translate to PCE inflation in 2 weeks.  We can also consider PPI’s notorious volatility and conclude it would take more than one of these surprises to raise a serious eyebrow. With that, the focus of the week remained squarely on yesterday’s big CPI victory.

UMBS ended the day up 20 bps at 101.13

Top mortgage lender United Wholesale Mortgage is upping the incentives it offers its network of brokers for making certain types of home loans, a move likely to accelerate refinancings that could have implications for buyers of mortgage-backed securities.

The mortgage wholesaler is offering an additional 1.25% of compensation to brokers for mortgages done through the Department of Veterans Affairs or the Federal Housing Administration, according to a notice on its website. The extra compensation will allow brokers to offer lower rates, giving homeowners a greater incentive to refinance with UWM.

That’s potentially problematic for buyers of MBS backed by Ginnie Mae, the government agency that guarantees VA and FHA home loans. Quicker-than-expected repayments cause bond investors to get their money back sooner, typically leading to lower returns.

“It’s still early, but I think this increases near-term prepayment risks for Ginnie Mae securities,” said Erica

Adelberg, an MBS strategist at Bloomberg Intelligence. “It also highlights the idiosyncratic risks that come with Ginnie originations being dominated by a relatively small number of large independent mortgage banks.”