Morning Report: Bonds sell off on a higher than expected CPI

Vital Statistics:

	Last	Change
S&P Futures	2672.8	11.0
Eurostoxx Index	373.4	2.9
Oil (WTI)	58.6	-0.6
US dollar index	83.6	-0.1
10 Year Govt Bond Yield	2.87%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.39

Stocks are up this morning on no real news. Bonds and MBS are down. 

Consumer prices rose 0.5% MOM and are up 2.1% YOY, according to the Consumer Price Index. Apparel drove the increase. Ex-food and energy the index was up 0.3% and 1.8%. These numbers are a little higher than what the Street was looking for, and bonds sold off about 5 basis points on the report. Between the CPI and the higher-than-expected wage inflation in the jobs report, Treasury investors are getting nervous about inflation. 

The Fed Funds futures are predicting a 78% chance of a 25 basis point hike next month. For the year, there is about a 1/3 chance of two hikes and a 1/3 chance of 3 hikes. with the final 1/3 split between 1 and 4. 

Goldman's inflation forecast is for a 1.8% increase in the core PCE. Despite upward creeping inflation, this is still below the Fed's target rate. 

Mortgage Applications fell 4% last week as purchases declined 6% and refis declined 2%. On the back of the jobs report, Treasury yields rose and mortgage rates hit the highest level in 4 years. The typical 30 year mortgage rate rose to 4.57% from 4.5%. 

Retail Sales were down 0.3% in January and were flat YOY. Weak auto sales were behind the change. The control group was flat. 

Fannie Mae reported earnings of $2.5 billion for 2017, after taking a $9.9 billion hit on deferred taxes based on the tax law. Adding back the $9.9 billion noncash charge gives the company net income of about $12.4 billion, about the same as 2016. The stock has a market cap of $10.7 billion, meaning it is trading at a P/E below 1. Arguably, the stock shouldn't exist in the first place, and it only trades due to the vagaries of government accounting. 

About 130 mortgage bankers sent an open letter to Congress stressing the need for GSE reform. The letter laid out their preference for a guarantor-based system over an issuer-based system. Essentially the difference would be that the guarantor-based system would be most similar to the current one, where someone like Fannie and Freddie do not originate mortgages, but guarantee than and issue securities. The issuer-based system would rely on a few large aggregators to secure the government guarantee and issue securities. The smaller bankers would probably be at some sort of competitive disadvantage under an issuer-based system and would be better off under a guarantor-based system. 

Federal Reserve Chairman Jerome Powell's prepared remarks at his swearing-in ceremony. "While the challenges we face are always evolving, the Fed's approach will remain the same. Today, the global economy is recovering strongly for the first time in a decade. We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives. We will also preserve the essential gains in financial regulation while seeking to ensure that our policies are as efficient as possible. We will remain alert to any developing risks to financial stability."