This is Matt Graham with the MBS Live Market Update. Last week was hotly anticipated, mainly due to the scheduled release of CPI, the Consumer Price Index. That’s one of the two big national inflation reports that we get every month, and it is the first of the two by a margin of about two weeks. It was also the first major opportunity to see tariffs reflected in the official data. That’s something that several Fed officials had also called attention to in the proceeding weeks. That’s important because the Fed has been leaning on the potential of tariff driven inflation to justify holding off on rate cuts that would otherwise be justified by the rest of the data landscape. They also make note of employment data, specifically, the fact that the unemployment rate remains low enough for them to be able to be patient on inflation. In other words, it’s a bit of a standoff between those two data metrics whereby if unemployment was rising quickly. They would probably end up cutting even if they continued to worry about tariff driven inflation or if inflation was not rising due to tariffs. They wouldn’t worry about unemployment being too low and they could justify rate cuts as well as it happened. CPI was a bit higher than last time, but also a bit lower than expected. The market initially reacted to that lower than expected headline with a bit of a bond rally, but it didn’t take long for things to reverse. After traders dug into the details and saw that tariffs were indeed impacting the numbers. While that impact wasn’t enough for CPI to come in higher than expected, any measurable impact was seen as helping the Fed justify continuing to wait to cut rates. As such, the bond market lost ground somewhat sharply on Tuesday, but that ended up being the weakest that the bond market would trade during the course of the Wednesday and Thursday were sideways to slightly stronger with Wednesday, bringing some interesting developments in terms of political headlines or monetary and political headlines as rumors circulated that President Trump was actively in the process of firing Fed Chair Powell. Some news reports mentioned that he had drafted a letter to that effect, and this all culminated in the White House releasing an official comment saying that Trump was not indeed aspiring Fed Chair Powell, although he would generally like him to go, the market reacted to the initial headlines very decisively with short-term yields, and by short, very short falling and most of the rest of the yield curve rising. This is precisely in line with most expectations for what would happen in the event of Powell being replaced by a more dovish fed share. Yes, the Fed is an entire board that needs to vote in order to change monetary policy, but the Fed share carries an outsized role in determining the direction of that policy. It may be fairly counterintuitive to see longer term rates moving higher. On the prospect of a more rate friendly fed share, but again, it’s precisely in line with most of the market’s expectations for such things based on the way the Fed balances inflation and employment mandate. Specifically, if the Fed was seen as forcing through rate cuts, if they weren’t necessarily justified by the policy playbook or even leaning a little bit too far toward a rate friendly stance. The concern would be that it causes excess inflation, potentially compounded by yet unknown tariff related impacts, and the market trades inflation concern in the form of higher rates. The other consideration is that the appearance of political influence at the Fed could damage investor sentiment and demand or treasuries. It also creates a natural consequence of a weaker dollar, which in turn can have a deleterious impact on treasuries. All of that ended up being neither here nor there. For the most part. There was a bit of a hangover in terms of spreads between shorter term bonds and longer term bonds. In other words, investors increase their demand for shorter term bonds simply based on the risk that something like this could happen. And if it does happen, those shorter term bonds will definitely fare better because the only part of the yield curve the Fed can control is the overnight rate part, which is logically most connected to the shortest term treasury debt. In the week ahead, things are looking fairly underwhelming. From a calendar standpoint, none of the scheduled events are big ticket market movers, and we won’t get any Fed comments due to it being the blackout period ahead of next week’s fed announcement. They’re not going to cut rates or say anything too crazy next week, most likely, and the market will instead be focused on the big ticket data that comes out next week, such as the first release of Q2 GDP. As well, of course, as the big jobs report on Friday. That’s gonna do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
Matt began as an originator in 2002. He fell in love with the idea of following MBS in real-time but felt that existing products were only scratching the surface. Thus was born MBS Live in 2007, the first-of-its-kind platform with real-time market data/analysis, and live chat with analysts, traders, and originators around the country. He is currently the Founder and CEO of MBSLive!
He’s been covering bond/mortgage markets, writing commentary, alerts, and chatting with the live community every business hour of every business day ever since.
Matt also serves as the Chief of Operations for mortgagenewsdaily.com, where he is one of the industry’s most respected mortgage rate experts, frequently quoted in the media. Mortgage News Daily’s rate index is used as the definitive resource on day-to-day mortgage rate averages.
He lives in the Pacific Northwest with his wife and son where he enjoys skiing, fishing, coaching youth sports, playing the guitar, and more DIY projects/hobbies than he’d care to admit.