Matt Graham, Founder and CEO, MBS Live
[Matt] This is Matt Graham with the MBS live market update. Last week was an important week for the bond market. Even if the outright movement wasn’t extreme, it was nonetheless favorable. And that was exclusively due to the consumer price index, AKA CPI. Which is the first major national inflation index that comes out on any given month and consequently one of the biggest market movers we have in an environment where everybody is waiting for confirmation that inflation is safely or assuredly on its way back down to a 2 percent annual level last week’s data for the month of June definitely makes a increasingly strong case for that, combined with the previous month of data, the annualized rate for those 2 months. would be well under 2%. June’s data specifically in unrounded terms at the core level came in at 0.065, which in annualized terms would be under 0. 8%, a far cry from the 2. 0 percent target. That’s not to say that one month of data is magically going to repeat itself 12 months in a row. It’s just letting you know that if this month of data is representative of what’s to come, then inflation is well on its way back to target levels. Will the Fed agree? That is debatable. We’re going to hear from Powell this morning, very shortly, and then we’ll get the next Fed announcement in a couple of weeks. And they will be able to comment on that. Although we will not get a new dot plot at that meeting. There is some suggestion. From various pundits and financial firms that the fed should cut in July. Some believe they will cut in July. The market odds are not very good on that front, but they have ramped up significantly for a September rate cut and then a subsequent cut. Likely in December, and that’s where Fed Funds futures are currently sitting with a total of two cuts at some point between now and the end of the year. That was arguably only one cut heading into last week’s CPI data, and the second cut followed that. A day later, we had PPI painting a completely different picture of inflation. Between the revision to the previous month and the beat versus the current month forecast, there was a total swing of 0. 5 percent in the year over year total. That is a very big move when it comes to inflation indices and potentially alarming, considering the market has increasingly been willing to react to PPI data. In the past year, but in this case, although there was a very brief, very noticeable reaction, it was very brief and the bond market turned around fairly quickly within about half an hour and ended up moving to stronger levels by the end of the day, all told, the week only saw a drop in 10 year treasury yields of about 10 basis points. And in terms of two year treasury yields, we dropped from about 4. 6 to about 4. 46. So closer to 15 basis points there. And that stands to reason when the market is reassessing its expectations for the fed rate cut outlook, that two year treasuries would outperform 10 year treasuries in an environment where we’re seeing more fed rate cuts as far as the weekend’s events. Clearly, everybody is talking about the failed assassination attempt on former president Trump, and some market participants are wondering how that would impact financial markets. And although there’s no objective way to say for certain, at the very least, we can probably conclude that it doesn’t harm somebody’s political capital when there’s a failed assassination attempt against them. In 1981, for instance Reagan’s approval rating instantly jumped eight points after he was shot. And for no other reason than he was shot. So if we extrapolate similar logic, we could say this. Likely improves the odds of Trump being elected and it gives us another opportunity to see what the market does when events impact the likely outcome of the election. Just like after the presidential debate, recall that when we talked about that, I had advised that was likely more to do with month end a new month trading, even though it was probably a more popular take that the bond market weakness At the time was due to the presidential debate. I didn’t think it probably was. And the weekend’s events suggest the same because. There was a reaction initially, but it was small and lower in volume than several of the events seen on Friday and really underwhelming if it’s some watershed event for election probabilities. So the focus continues to be on data as far as what the bond market is going to do. And the only wild card I’d throw in there is it’s not so much about the Oval Office as it is about full control of both houses of Congress and the Oval Office. So if one party is in full control, that’s the biggest political news as far as the bond market is concerned. It makes it easier to create a revenue imbalance that tends to push bond yields higher. A little bit of political gridlock is generally better for the bond market as far as this week. It is less intense than last week, simply due to the fact that there is no CPI report, but we do have Fed chair Powell again, speaking today and retail sales would probably be the headline event that’s coming out tomorrow at 8 30 AM has been a market mover on several recent occasions, other than that, just housing data coming out. It’s interesting to the housing market, but not a big market mover for the bond market and tons of fed speakers who may finally be able to say something a little bit different, maybe a little bit more foreshadowing regarding how they’re feeling after seeing last week’s CPI data. We will see by the end of the week. And that’s all for now. Back to you.