Wednesday – June 12, 2024

Oh Glorious Day.  UMBS are up 46 bps in the first hour of trading!!

S&P Futures up 6.75 points

Headline CPI MoM = 0 vs 0.1% forecast    [0.3% Prev]

Headline CPI YoY =  3.3% vs 3.4% forecast   [3.4% Prev]

Core CPI MoM = 0.2% vs 0.3% forecast        [0.3% Prev]

Core CPI YoY = 3.4% vs 3.5% forecast        [3.6% Prev]

Food index increased 0.1% in May after being unchanged in April

Energy index decreased 2% in May after rising 1.1% in April

Shelter index increased 0.4% in May after rising 0.4% in April

  • Owners’ equivalent rent of residence increased 0.4% in May after rising 0.4% in April; up 5.7% y/y

Pretty self-explanatory morning so far.  Bonds were flat.  CPI came in better than expected.  Now bonds are not flat.

Separately, yesterday’s 10-year auction went well, which helped push down bond yields.

This news comes just before the expected Fed interest rate decision at 2:00pm ET Today with Powell’s press conference scheduled for 2:30pm ET. The Fed’s commentary could be a hot point Today as investors look for new clues on how and when the Fed may act if we continue to see inflation retreat. If PPI misses the mark Tomorrow, we could see additional momentum build around the rate cut narrative as well.

Pre-Covid, consumer credit grew by $15 billion/month and remained that way through 12/21. During CY2022, consumer credit growth jumped to $30 billion/month, but since 1/23 growth has steadily weakened and is now about $5 billion/month. Moreover, credit card balances declined by $462 million in April, the first decline in three years, evidence of strain on low- and middle-income households who rely more on plastic and less on their portfolio.

Federal Reserve officials penciled in just one interest-rate cut this year and forecast more cuts for 2025, reinforcing policymakers’ calls to keep borrowing costs high for longer to suppress inflation.

Officials voted unanimously to keep the benchmark federal funds rate in a range of 5.25% to 5.5% — a two-decade high first reached in July. But policymakers signaled they now expect

to cut rates only once this year, compared to the three reductions forecast in March, according to the median projection.

And MBS have moved slightly weaker.

  • FED OFFICIALS’ MEDIAN VIEW OF FED FUNDS RATE AT END-2024 5.1% (PREV 4.6%)
  • FED: DOES NOT EXPECT IT WILL BE APPROPRIATE TO REDUCE POLICY TARGET RANGE UNTIL GAINING GREATER CONFIDENCE INFLATION IS MOVING SUSTAINABLY TOWARD 2%
  • FED OFFICIALS’ MEDIAN VIEW OF FED FUNDS RATE IN LONGER RUN 2.8% (PREV 2.6%)
  • FED: INFLATION HAS EASED OVER THE PAST YEAR BUT REMAINS ELEVATED
  • ED: RISKS TO ACHIEVING POLICY GOALS HAVE MOVED TOWARD BETTER BALANCE
  • FED PROJECTIONS IMPLY 25 BPS OF RATE CUTS IN 2024 FROM CURRENT LEVEL, ANOTHER 100 BPS IN 2025

No major surprises in the Fed announcement or dot plot.  We knew they would be pricing in fewer rate cuts in 2024.  The median view technically moved up to 5.125 from 4.625, but notably, 5.125 is also the lowest possible rate seen at the end of the year.

In other words, the dots are very hawkish, and they account for the modest weakness seen after the announcement.

As discussed in the AM commentary, bonds rallied sharply after this morning’s CPI data (unrounded core monthly inflation at .163% versus a 0.3% forecast).  Those gains held up uneventfully until the Fed festivities began.  The most significant item on the Fed agenda was the dot plot at 2pm which showed the median outlook for 2024 rate cuts falling to “one” from “three.”  Fed Chair Powell offered no dovish reassurances in the press conference, nor was he even very enthusiastic about this one month of data.  All of that was to be expected, but markets nonetheless acted like they expected at least a little token of rate rally affection.  By 4pm, about half of the CPI gains had been erased, but that’s still a solid day in the bigger picture.

UMBS closed up 24 bps.  Though down 13 bps from the highs of the day.

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