This is Matt Graham with the MBS live market update. The last two weeks have been extraordinarily eventful for the bond market with a few bigger picture milestones being taken out. The most significant of those occurred on Monday morning with the uninversion of the yield curve for the first time since it inverted. About two years ago, that an inversion came in response to a sharp bond market rally on Monday morning itself in response to the unwinding of the yen carry trade, which we began to discuss last week, but it was in hindsight, a very significant contribution to the market movement that took place over the weekend, as well as some of the rally that took place in the previous week. Surrounding the jobs report and the Fed announcement all told it got yields to the lowest levels in more than a year and again, cause an uninversion of the yield curve that was soon unwound and the rally seen Monday morning was unwound by the end of the day. And from that point on the bond market got back to the business that we thought was. Probably the base case for the week, which was a nominal correction in the bigger picture due to an absence of economic data, the presence of a treasury auction cycle and the looming realities and revelations of the inflation data in the present week. So that brings us to the present week in which we have Producer prices tomorrow, and more importantly, the consumer price index on Wednesday, these reports and especially CPI are in a great position to confirm the recent shift in inflation trends that has been so palatable to the bond market and in general, anytime we see a core CPI reading of 0. 17 or lower, and we have to look at unrounded numbers to determine if it’s 0. 17, otherwise it’s just going to come out at 0. And it could come out at 0. 3 and then rates would go higher, but anytime we see 0. 17 or thereabouts, that is in line with the Fed’s 2 percent inflation target. The market will also be looking at internal components such as the shelter component. And recall that after the last CPI report, that was the first time that we saw meaningful progress toward lower shelter costs. If that’s a trend that continues, it says good things about. Rate cut potential at the coming meeting. The market is pretty certain that we’re going to see at least one 25 BIP rate cut from the Fed if not a 50 BIP cut whether or not it’s 50 BIPs really depends on the tenor of Economic data between now and then with this week’s inflation data being one of the three key moments in that Discovery process. The other two would be the next CPI, which comes out just before the Fed announcement and the next jobs report that comes out in early September. If all of those are incredibly rate friendly. Yes, there could certainly be an expectation for a 50 bit cut, but there’s other economic data to consider as well, which we saw a good example of last Monday when ISM Services came out stronger than expected. And really helped push the bond market back into that corrective territory after the sharp overnight rally in terms of other data this week we do have a smattering of important reports on Thursday morning. They’re not. In the same league as CPI on Wednesday, but retail sales certainly has been a market mover at times and then, of course, jobless claims is being closely watched as a potential barometer or an early indicator that the labor market may be softening. Also could be an early indicator that the softening seen in the last big jobs report was one off or premature, but in any event, it’s always a combination of multiple employment indicators that the market uses to get a sense of what’s going on with the labor market. There are several housing specific reports throughout the week. In addition to the, with us as always MBA application numbers on Wednesday, later that same morning, we’ll get the national association of home builders, housing market index, AKA builder confidence at 10 AM expected to tick up just a little bit from 42 to 43. Thank you And then on Friday, housing starts and building permits expected to hold steady at about 1. 45 million, respectively. That’s going to do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
