Market Update: CPI missed low – 10 yr plummets by 17 BPS so far to under 4.50 and still trending

Hello All,

A good day for mortgage rates. CPI came in very close to what was thought to be possible in yesterdays write-up. However, Shelter continued to be strong. It came down materially from last months .6% reading to .3%, but if that had come in lower, we would have had a NEGATIVE Headline reading and an even lower CORE reading, which would have pushed the annual CORE rate into the 3.8% – 3.9% range. The good news is it was not .6%, but that really needs to cool further to get us to where we need to.

Headline dropped to an annual rate of 3.2% on a 0% increase.

CORE dropped to an annual rate of 4.0% on a .2% MoM increase.

Chart with Headline (blue) and CORE (red) showing the Annualized rate of inflation as of each report. You can see the 3.2% and 4.0% as outlined above after today’s release, which was October’s data.

Some interesting thoughts when annualizing current CORE readings to see what the most recent trending has been. Remember, the Feds want CORE to get to .2%. That does not mean they will wait until .2% before they begin cutting or they will over shoot it. They have to find that balance, which is not now, but we made a positive step and likely took a hike in December 100% off the table.

CORE:

The 3-month annualized rate was 3.4%, vs 3.1% in Sept
The 6-month annualized rate was 3.2%, vs 3.6% in Sept

Here is a good chart on the 1, 3, 6 and 12 month for key categories of the report:

Below is the chart with the major categories. Inside the actual report are tables that break down everything into the sub-categories and you can see what went up and what went down. Remember, each category has different weighting. Shelter is a big one that comprises over 34%. In the detailed chart, column 1 is the weighting. Here is the link to the BLS October CPI report to read in more detail and see what I am referencing here. The below charts come from this report. This is an easy read and will help you understand CPI much better. https://www.bls.gov/news.release/pdf/cpi.pdf

What was the largest changes in Headline?

Food dropped to flat vs up .4% – Food away from home is still elevated and actually went up (restaurants)
Energy went down to -1.5%, which was expected and the main driver for the low Headline print
New and Used cars both were negative with new vehicles dropping from .3% to -.1% month over month
Shelter dropped from .6% to .3% as outlined above, but it was still up .3%. That needs to cool further.
Transportation was still high at .8%, up from .7% last month
Medical Care was flat month over month, but still elevated at .3%

Next month, there is only a .2% number being replaced as you can see below. Energy prices will be a big factor in the headline number. CORE will hopefully drop down on cooling Shelter costs. CORE is heavily weighted to Shelter because Food and Energy is stripped out, so Shelter makes up 43% of CORE. So, we need rents to come down and we need the rent equivalent to also cool. That could be looked at as kind of rooting against the little business we have in a way on the rent equivalents. However, the counter to that is we need more homes for sale, more loans to do and more homes to sell, without the increasing prices. That is very possible to begin to happen, but we need rates to come down more for this to truly be impactful.

My guess is homebuilders’ stocks will move up materially today with light showing and such a positive day. Continue to chase homebuilders, they have inventory.

Now, let’s hope for another positive reading on the PPI tomorrow, followed by slower manufacturing data and what would be a massive win would be a Thursday large jobless claims jump.

10 yr since starting this write-up has now moved down almost 20 BPS and is at 4.43!!! Big day for rates on the lower end, not so much for closer to market rates. The higher coupons were negative earlier but have since reversed to be closer to flat with UMBS up maybe 20 BPS. Lower coupons on buydown rates in the 5’s have moved 130 BPS so far today!

Josh Erskine

Chief Executive Officer

CalCon Mutual Mortgage LLC dba OneTrust Home Loans
Yellowstone RE Holdings LLC
Yellowstone Global Investments LLC