When Doves Cry
Prince, the pop icon, sang “dig, if you will, the picture” in his song, “When Doves Cry.” Prince was clearly alluding to America’s dovish inflationary picture and knew the market would dig it. Indeed, stocks soared higher and bond yields were marginally lower following the latest inflation report. The smaller than expected price increase ought to provide enough room for doves at the Fed to move ahead with additional rate cuts this year. With lower rates, everyone in the mortgage world may cry tears of joy too.
The data—thankfully provided by the Bureau of Labor Statistics in the midst of the fourth week of the government shutdown—suggested muted pricing pressures on a month-over-month basis. The headline figure rose 0.3% vs. the 0.4% September expectation, while the core figure came in at 0.2% vs. the 0.3% estimate. The 0.2% increase in core inflation, which excludes the volatile food and energy categories, marked the lowest print in three months. But on an annual basis, inflation still rose at a 3% clip.
When stripping out those noisy sectors, the core services sector has been on a downward—and, more recently, plateauing—trend in its contribution to inflation since 2021 (Figure 1). This suggests that the core services sector is not a new inflationary pressure to be concerned about.
The core goods sector, however, tells a different story. Core goods—defined as transportation commodities (excluding motor fuel), household furnishings/supplies, apparel, recreation commodities, medical care commodities, alcoholic beverages, education/communication commodities, and other goods (catch all)— lowered inflation from mid-2023 to mid-2024, but has fueled inflation for most of 2025.
The increase in goods inflation thus remains one of the battlefields for the doves in their fight with the hawks. Last week, for example, Federal Reserve Governor Michael Barr called for a cautious approach regarding future interest rate cuts, citing the possibility that tariffs could create persistent inflation. “Common sense would indicate that when there is a lot of uncertainty, one should move cautiously,” Barr said. “While, in principle, tariffs are a one-time increase in prices and should not sustainably raise inflation, that may not be the case if prices keep rising month after month and affect expectations.”
Many officials at the Fed have largely dismissed the notion that persistent inflation is in the cards, vis-à-vis tariffs. Nevertheless, Barr represents a portion of the Federal Open Market Committee (FOMC) that remains hesitant to move quickly.
Meantime, the slowdown in the labor market garnered much attention from doves in recent months: The economic data, even if considered tier two or three in relative importance, points toward a measured slowdown or soft patch. “Even if the labor market is still roughly in balance, the fact that this balance is being achieved from simultaneous slowing in labor supply growth and in hiring suggests that the labor market is more vulnerable to negative shocks,” Barr conceded.
Last week’s inflation report gave the doves the evidence they needed to continue cutting rates more toward neutral this week. The report may even help convince policymakers that they can cut again in December— especially in the absence of other official reports, should the shutdown continue.
FROM THE DESK
Agency CMBS — Ginnie Mae spreads were biased wider last week, as the broader investment community grew less favorable toward the REMIC product. We heard anecdotes that buying in September/October dampened after the strong July/August cycles. DUS continued to trade well, with buydown full term interest only (FTIO) loans the most desired.
Municipals — AAA tax-exempt yields were again higher on the short end of the yield curve and lower on the mid to long end of the yield curve, week over week. The municipal bond market saw heavy new issuance last week, with almost $18 billion coming to market. Municipal bond funds saw a fourth straight week of inflows: $1.1 billion entered (YTD inflows of $20.83 billion), including $179 million for high-yield funds. Of the total inflows last week, long-term municipal bond funds received $830 million. Meanwhile, the short end of the curve continues to weaken—investors are looking to put money to work longer, in order to lock in higher rates.
ECONOMIC CALENDAR FOR THE WEEK AHEAD
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