A Hotter CPI Gives Back the Post-Election Rally, Why We’re Not Panicking

Key Takeaways

• October’s core CPI came in hotter than expected, interrupting a steady, month-long improvement in mortgage pricing.
• Today’s move pushed yields back to roughly where they sat on election day we gave back the post-election gains, but we’re still in a good spot.
• The 2-year Treasury jumped, which tells us the market is leaning toward another Fed hike in December. That hits lines of credit and HELOCs not mortgage rates directly.
• The 10-year yield is flirting with 5% again.
• Lenders saw this coming: we saw only about 10 reprices today (all worse), meaning most lenders built the news into their rate sheets from the start.
• We’re taking this inflation number with a grain of salt. October’s data still reflects higher oil prices from August and September, and oil has been falling.

Where We’ve Been: A Month of Improvement

This is our first full market and mortgage rate update since the election, and it’s been a strange stretch. Over roughly the last month, mortgage pricing worked its way down on a nice, steady trend, great news for our clients and for anyone who has been waiting on the sidelines.

The driver was oil. As the election approached, traders increasingly priced in that the upward pressure on oil would ease once the election was behind us. Lower oil expectations mean lower inflation expectations, and lower inflation expectations are what bring long-term rates and mortgage rates down. That trend line made sense.

Then the election came, and the move accelerated:

Election day Yields settle near their pre-election levels.

Wednesday & Thursday after Oil prices drop sharply, inflation expectations fall with them, and yields across the curve move meaningfully lower. The 10-year touches its lowest level since September.

Last Friday A very strong jobs report, great for the economy, not great for the argument that the Fed should hold off.

Today A hotter-than-expected CPI report puts us right back around election-day levels.

Today’s CPI: A Little Too Warm

The month-over-month core CPI came in hotter than forecasts, 0.4% versus .03% forecasted. After a stretch where inflation data and inflation expectations had been cooling, this was a step in the wrong direction, and the bond market reacted the way you would expect: yields rose.

The good news is where that leaves us. Today’s move erased the post-election rally, but it didn’t erase the month-long improvement before it. We’re essentially back to election day, and that is still a better place than where we were a month or two ago.

Why We’re Taking This Number With a Grain of Salt

Remember what this report actually measures: October prices. And here’s the part that often gets missed, the oil prices that fell in October were mostly futures contracts, the price of oil to be delivered later. They weren’t what was actually flowing through to consumers last month.

What consumers paid for in October was built on the higher oil prices of August and September. So the October CPI is essentially showing us the tail end of that earlier spike, already baked into the pipeline. The lower oil prices we’ve seen recently haven’t had their chance to show up in the data yet.

The oil prices from August and September are what we’re seeing in the October numbers. The trend line should work its way back down again.

That’s why we remain optimistic. If oil holds its recent declines, the inflation readings over the coming months should reflect it.

The 2-Year, the 10-Year, and the Fed

The 2-year Treasury: the Fed’s tell

The 2-year yield rose significantly today, and that’s the part that concerns us most. The Federal Reserve’s decisions follow the 2-year yield almost like clockwork. When the 2-year climbs, we can fairly safely forecast that the Fed may hike and the market is still pricing in another hike at the December meeting.

We don’t think they need it. The Fed itself has acknowledged it can’t control oil prices, and much of the recent inflation has been oil-driven. Our view: let this play out and let oil prices keep working their way down. But strong jobs numbers don’t help the case for holding.

A Fed hike is not a mortgage rate hike

This is worth repeating because it’s one of the most common misunderstandings in real estate: the Fed funds rate does not set mortgage rates. The Fed funds rate is an overnight rate. A mortgage is a 15- to 30-year loan. Comparing the two is comparing the shortest term in the market to the longest.

Where a December hike does bite is short-term, variable-rate borrowing, home equity lines of credit and other lines of credit tied to prime. If you or your clients carry a HELOC, that’s where you’d feel it.

The 10-year: back near 5%

The 10-year Treasury, which tracks much more closely with mortgage rates, rose today and is flirting with a 5% yield again. That’s the number to watch heading into the next round of data.

What Lenders Did Today

Here’s an interesting detail from behind the scenes. From what we could see across the market, there were only about 10 reprices today, and all 10 were for the worse.

That might sound bad, but it actually tells us lenders did a good job pricing this morning. On a day when the 10-year moves around 10 basis points, we’d normally expect a flood of reprices closer to 50. Instead, most lenders anticipated the CPI reaction and built it into their rate sheets right away. The handful of reprices most likely came from lenders that released their rate sheets early, before the full market reaction set in.

We also noticed several lenders, including a couple we work with that normally publish around 10:00 a.m. central, releasing their pricing later than usual. That makes sense: when the data is uncertain, holding your rate sheet until you see how the market settles is the prudent move.

What This Means for You

• Buyers: Pricing is still better than it was a month or two ago. Today was a setback, not a reversal of the trend.
• Homeowners with a HELOC or line of credit: A December Fed hike would raise those payments. It’s worth reviewing your balance and options now.
• Realtors: If clients bring up “the Fed is hiking, so rates are going up,” that’s your opening to explain the difference between the Fed funds rate and mortgage rates. The 10-year and inflation trends are what matter.
• Anyone in process: In a market that can move 10 basis points on a single report, having a broker watching lender pricing daily matters. Talk to us about locking strategy.

What We’re Watching Next

• Oil prices — whether recent declines hold and start flowing into consumer prices.
• The 2-year Treasury — our best read on whether the Fed hikes in December.
• The 10-year and the 5% level — the clearest signal for mortgage pricing.
• The November jobs report — the last employment data before the Fed’s December meeting.

By Charlie Braden & Will Braden, J. Charles Lending · From this week’s episode of Beyond the Rate