UMBS are flat on the open. S&P stock futures down 19.5
Bonds were slightly stronger overnight, but have been selling steadily since the start of domestic trading. The latest dagger comes from the 10am Consumer Sentiment headline. While only modestly higher than expected, traders are surprised to see yet more evidence of economic resilience when the data from 2 weeks ago seemed to argue so compellingly to the contrary.
The impact might have been bigger this morning had it not been for flat inflation expectations and another drop in the “current conditions” component of the index.
Consumer Sentiment = 67.8 vs 66.9 f’cast, [66.4 prev]
Consumer Inflation Expectations = unchanged vs previous
Consumer Current Conditions = 60.9 vs 62.7 prev [lowest since Dec 2022]
July CPI fell to 2.9%, its lowest level since 3/21, while the more important core measure hit 3.2%, its lowest since 4/21. Moreover, over the last three months core CPI is up 1.6% annualized, down from 2.1% in June. The major problem, housing. It was responsible for 90% of the CPI’s 2.9% Y-o-Y rise. Nonetheless, a 25bps September cut is guaranteed and maybe 50bps, or more likely 25bps in November.
Fed’s focus now shifts to next week’s Jackson Hole conference, macro data, and the Sep 6 Jobs Report to confirm either a 25bp or 50bp September ease; Daily Fed-speak has highlighted the dual mandate focus on unemployment with inflation now trending lower; Federal Reserve Bank of Chicago President Austan Goolsbee : “Historically, if the unemployment rate starts going up, if temporary employment numbers go negative, that’s kind of a leading indicator. There are some various leading indicators of recession, and some of those are giving warning lights, but there’s cross currents.. When things start to go wrong in the job market, they don’t tend to do so at a slow basis. It tends to go up like a rocket and down like a feather in that space” (Bloomberg)
At first glance, the first half of the trading day has been volatile for the bond market, but at second glance, trading levels are just returning in line with the same narrow, sideways ranges seen for most of the day yesterday.
Jobless Claims data spoke up on Thursday and demanded to not be included in our list of 2nd tier data, even if it had some help from Retail Sales. From here, it’s much easier to label Friday’s data as 2nd tier as well as most of next week. That takes us into the Fed minutes on Wed and the Jackson Hole symposium on Thu/Fri. Between now and then, risk averse clients should consider that bonds may be at risk of an additional re-think of the gloomy econ data in the first week of August. Risk tolerant clients are relying on technical ceilings as lock triggers. If the break above 3.89% today wasn’t enough, the next ceiling is 3.97% (or wherever you set it, since there is always artistic license with “key levels”).
UMBS closed the day up 15 bps.
