[Matt]
This is Matt Graham with the MBS live market update last week was hotly anticipated, to say the least, coming off the previous week's super strong jobs report numbers and the associated bond market sell off. Traders were waiting for CPI and the fed the consumer price index to have the final say as to whether or not rates should be heading higher or holding steady, possibly moving lower. As it turns out, the vote was to hold steady and move lower when CPI, especially month over month core CPI, came in at 0.2 versus a 0.3 forecast. Moreover, that number is unrounded at its most basic level, and that unrounded number was point 163 which, if multiplied by 12, would give us the 2% annual inflation target. Of course, we need 12 months of that to actually pan out before inflation is officially at the 2% target. But when these individual months of on target inflation happen, and especially when they happen in such a perfect way that is either at or below 2% it is one of those things that increases the Fed's confidence that they'll be able to deliver rate cuts in 2024 they still see themselves doing that, but at a slower clip than the previous fed projections indicated. The summary of economic projections is released on four out of the eight fed meetings each year. This was one of them. So later that same day, on Wednesday, when the Fed's summary came out, it showed the rate cut expectations falling to once in 2024 as opposed to three times in the previous report back in March. But there's a little bit of a nuance to that, because it's not as if they get together and decide on one consensus number, they submit all of their projections as individuals represented in a dot plot. And those dots are sort of all over the map. So one could say, while the median dot last time called for three rate cuts in 2024 it was more like two to three rate cuts if you were looking at the distribution of the dots. And while the current dot plot only calls for one. You could say it's one to two cuts, depending on how things go. The other consideration here is that the data came out very close to the dot plot, and while the Fed members do have the ability to revise their dots right up until they are reported Fed Chair Powell reminded the market that only some of the Fed members actually do that, and most do not. Therefore, what we can assume is that if the Fed had updated their dots in response to CPI, they likely would have indicated two rate cuts as opposed to one. Not that that really matters, because it has more to do with the data that's going to come out in the next month or two, and less to do with the Fed's dots when it comes to deciding where rates are going to go. Another layer of intrigue came the following morning, with the Producer Price Index coming in much, much lower than expected, 0.0 versus a 0.3 forecast at the core level, and it was accompanied by a higher jobless claims number. Both of those things also likely would have factored into fed member decisions as to where they were going to place their dot for the appropriate level of the Fed funds rate by the end of the year and the next few years. Speaking of that, while the Fed does see 2025 ending at a slightly higher rate than it did back in March. 2026 is seen at the same rate as it was in March. From here, we are waiting for relevant economic data as has been and continues to be the case. The jobless claims number last Thursday was interesting because at 242 versus a median forecast of 225 it was the highest reading in nearly a year, and could signal a potential shift in the labor market. The counterpoint to that is that there is some suspicion or doubt that the seasonal adjustment factors might be a little bit out of whack in that data, because we did see arguably some of the typical seasonal patterns bleed through into the adjusted numbers last year, and now this year's spike is happening with the exact same timing as that. We won't really know if it's a legitimate uptick in jobless claims, or if it is an out of whack seasonal until August, which is when those seasonal adjustment factors would normally bring the claims level back down. Looking ahead, economic data this week is in lighter supply than last week, but we do have the important retail sales report coming out tomorrow morning, a 20 year bond auction. And multiple fed speakers, and then a full market closure on Wednesday for Juneteenth, back in the office on Thursday for building permits, housing starts, jobless claims, Philly Fed index and more fed speakers. Friday ends with s and p, globals, manufacturing and services indices both have been pretty significant market movers recently, and then Rounding things out as existing home sales and leading economic indicators at 10am the balance of that data is nowhere near on the same level as the data we had last week, but taken together, definitely has the power to either reinvigorate the recent downtrend in rates, or to give it pause and make rates sort of go sideways until they get the really meaningful data that tends to come out in the first and second week of any given month that's going to do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
