Matt Graham, Founder and CEO, MBS Live
[Matt] This is Matt Graham with the MBS live market update last week was unequivocally all about Wednesday’s CPI release, the consumer price index that has taken the place of the jobs report as the most important piece of scheduled economic data on any given month these days. And it did not disappoint in terms of the amount of market movement relative to the level of excitement associated with the report. What I mean by that is the core month over month reading came in right in line with the forecast, and even that was enough for a substantial reaction in financial markets. We should also consider that retail sales came out at the same time and was quite a bit weaker than expected at 0.0 versus a forecast of 0.4 the previous month, which was quite high and had resulted in obvious bond selling, was also revised down, but only by a 10th of a percent. Nonetheless, the average piece of commentary out there suggests that the on target CPI, the core CPI specifically, was the more inspiring of those two economic reports at 8:30am on Wednesday morning, and core CPI came out at 0.3 versus 0.3 and the previous month was at 0.4 All in all, this is building a very slight, very modest downtrend in core monthly CPI over the past few months. We still have a long way to go before we get to the 2% inflation target, because year over year, Core CPI is still 3.6 and of course, if you annualize a 0.3 month over month reading, that would be 3.6 as well. So we need to get that number down to an average of 0.17 which is going to mean that we have point ones and point twos in core CPI in order to hit the 2% inflation target. Of course, the Fed will likely cut rates before we get there, as long as it looks like that’s where we’re going. And if you were to ask the Fed right now, they are not entirely convinced that that is the case. We already knew that they were holding off on rate cuts in 2024 so far due to the unexpectedly high inflation in q1 and this most recent CPI is sort of being chalked up as Yeah, that’s nice, but one report doesn’t really change the trend that we’ve seen in the past few months, so we’d like to see more data. With that in mind, it’s not too surprising that the bond market hasn’t been quick to move in either direction after CPI. Yes, we did have an obvious reaction on Wednesday morning, but it was not a very big reaction, and it was subsequently reversed over the next two days in very gradual, technical fashion, not the kind of thing that was clearly associated with any fundamental market mover or news headline that was driving trade. There were other events in the week, but they didn’t cause big spikes in volume or volatility, and moreover, the Thursday morning data was arguably in favor of rates moving lower, but instead, rates moved higher, as if to say we were pricing out or having a little bit of correction after the CPI data. The only counterpoint to that is the import price data on Thursday morning was negative for bonds, and it was substantially higher than expected at 0.9 versus 0.3 but while import prices sound like a big ticket inflation report, they almost never moved the bond market. I do think that they contributed to the weakness on Thursday morning, but when you look at the five day chart. It’s a very, very gradual bounce back from the CPI related yield lows, and those yield lows occurred right at 4.34 which has been a very prevalent technical level for 10 year treasury yields. Technicals don’t predict the future, but they can help us sort of identify what the market is doing in terms of a significant move higher or lower. So if we were going to say that the post CPI move was significant, it would have had to have broken 4.34 it didn’t. And now we’re moving back up into that range with 4.34 as a floor and 4.5 as a ceiling. And that range would classify as boring, quote, unquote boring between now and the next big ticket, market movers, which arguably don’t come in until the first week of June, because this week, there really is nothing significant on the calendar. We do have durable goods and a couple other economic reports, but none of them have been consistent. Market movers. You could make a case for consumer inflation expectations in the consumer sentiment report on Friday, having been market moving events, but this is just the final reading. We’ve already gotten the flash reading, and the flash reading, or the preliminary reading, did have an effect due to higher inflation expectations. Similar story with. If the S P Global’s PMI data, in this case, it’s the flash reading and generally, not as big of a market mover as the final reading, which lines up better with the ISM PMIs in the first week of June, the week ends with an early close on Friday and a three day weekend for Memorial Day, with full closure on Monday, that also tends to affect trader participation and make things generally lower consequence, but sometimes more oddly volatile on those days surrounding the three day weekend. But again, we’re really waiting for the first week of June for significant information and significant market reaction. That’s all for now. Back to you.