Matt Graham, Founder and CEO, MBS Live
[Matt] This is Matt Graham with the MBS Live Market Update. Last week was less eventful than the week before. When it came to bond market volatility and interesting developments that impacted the bond market. In fact, there really weren’t any developments that overtly impacted the bond market if we were looking for big ticket items on the calendar, one might’ve focused on retail sales on Tuesday morning and potentially Fed Chair Powell’s interview at the Economic Club of Washington on Monday morning. Although those who follow Fed comments closely would probably have predicted that there’s not much that Powell would have been able to say, other than to acknowledge progress in recent inflation data and to say this brings us closer to the point of I’m making a decision on rate cuts. In fact, he went out of his way to avoid giving any firm commentary on a timeline for rate cut but did generically applaud the progress in the data and seemed to suggest that Q1 had been a bit of a curve ball for inflation data and that things had calmed down since then. All of that’s consistent with the Fed moving toward rate cuts in September that’s the market consensus right now. There is really not much of a chance that a rate cut would happen in July and bond market pricing suggest the same Tuesday morning retail sales was interesting because it came in right in line with forecasts at the headline level, but bonds and nonetheless attempted to sell off initially this had to do with internal components of the report. There are a couple that traders focus on, one being the control group, which excludes autos, gas, building materials, etc. But let’s just take a more simple approach and just exclude auto sales and gasoline and in that metric, the retail sales were much stronger than the previous month and actually painted a picture of accelerating demand among consumers, but it didn’t last long in terms of the market reaction and bonds actually ended the day in stronger territory after the initial sell off the rest of the week was very uneventful yields bottomed out on Wednesday and then moved gradually higher on Thursday and Friday, but not for any specific reasons. There were multiple fed speakers who reiterated different versions of the same message, which is that they are indeed getting closer to cutting rates, they don’t want to do it wrong. They don’t want to cut too soon. And they also don’t want to wait too long and run the risk of increasing harm to the economy from policy that is overly restrictive or at least more restrictive than it needs to be Thursday morning economic data was interesting in the sense that jobless claims came in at 2.43 versus 2.30K That is at face value. The sort of thing that builds a case for a trend toward labor market weakness. But as we’ve discussed a few times in the past, the seasonal adjustment factors for the jobless claims data might not be firing on all cylinders these days. In other words, if you look at a non seasonally adjusted chart, there are some correlations to the seasonally adjusted charts, not just for this year, but for previous years as well and that shouldn’t be the case. The seasonally adjusted numbers should do a better job of smoothing those things out. So what we can do to get around that is to compare non seasonally adjusted numbers across several years. And when we do that, we see that 2024 is really no different than any of the past years that are valid points of reference. 2020 and 2021 are not valid points of reference because jobless claims were on the move in such an extreme way but going all the way back to 2017, 18, 19, and then 2023. We see significant correlation and no major divergence so far in 2024, that could change if it changes, it will be significant. That’s 1 reason that the bond market isn’t keen to react to that. Over the weekend. News of Biden dropping out of the presidential race has not created any reaction in the bond market. There’s a bit of volatility later in the morning. It’s unrelated to that. There is no big glut in volume. It’s very easy to see what an over the weekend event that actually matters looks like when we compare it to the assassination attempt that impacted markets on Monday the 15th when they opened for the week. In that case, volume was more than seven times higher than it was today in the first hour of trading and the movement in treasury futures contracts was significantly larger as well. Pretty night and day comparison. Is there anything to read into that? Not really, other than the fact that the bond market just does not seem keen on trading major political events at the moment that could change, but as we’ve discussed in the past, it is typically a bigger deal when there is a one party sweep of House, Senate, and the Oval Office and until and unless that looks like something that’s going to be happening, the tradeability of it is somewhat questionable. In the remainder of the week, biggest ticket events are going to be centered around the quarterly GDP data and the monthly PCE data. This is our first look at GDP for Q2, and that will be on Thursday morning. The market is expecting it to come in at 1.9 percent after 1.4 percent previously. And then PCE the following morning is the Fed’s preferred big picture gauge of inflation. They’re expecting it to drop to 2.5 percent previously. And that would involve an on target read of core monthly PCE at 0.1 This is the same month of inflation data that we got in the CPI report two weeks ago. So if it doesn’t differ materially from that, then there’s not really going to be a big reason to trade it. And if it does differ materially, the market still won’t likely trade it as aggressively as they would with CPI, which is the first major monthly revelation for EconData. That’s going to do it for this week. Back to you.