Friday – September 27, 2024

Finally in the green!  UMBS were up 9 bps in the first hour of trading. Stock futures up 2.75 points

PCE inflation data only wishes it could be in the same league as CPI when it comes to the ability to influence bond market trading levels.  Moreover, inflation data now only wishes it could be the jobs report in that same regard (despite arguably being the more important indicator up until several months ago.

Still, a 0.0 core M/M reading would have likely helped bonds noticeably and a 0.4 reading would have hurt.  We surmised that the latter would hurt more than the former would have helped and the market reaction so far is in agreement (perhaps due to the unrounded number being on the higher side).

M/M Core PCE = 0.1 vs 0.2 f’cast,     [0.2 prev]

Unrounded 0.13

Y/Y Core PCE =   2.7 vs 2.7 f’cast,    [2.6 prev]

Personal incomes rose 0.2% MOM in August, according to the Bureau of Economic Analysis. Personal consumption expenditures rose 0.2% as well. The drop in spending was pretty dramatic, falling from 0.5% in July. Both the income and consumption numbers were below consensus.

Overall, the report shows that the battle against inflation has largely been won, and the concern is now turning towards economic weakness. Much of the GDP growth over the last quarter was due to inventory build, which means the economy requires robust consumption to maintain that growth rate. August’s consumption numbers were the first half of the back-to-school shopping season, which is a good barometer for the holiday shopping season. If the consumer is tapped out, economic growth will slow, and production will halt as manufacturers and retailers need to move the merchandise first.

Overall, this means that the Fed needs to get back to neutral in a hurry if it doesn’t want to tip the economy into a recession.

Much of the past week has been spent monitoring the “post-Fed correction”–a nominal pull back in the impressive rate rally of the past several months following last week’s Fed announcement.  If you prefer “buy the rumor, sell the news” on the Fed rate cut, it’s the same thing.  By the end of this week, the correction finally looked to have leveled off, even if it got a bit of help from cooperative econ data.  The timing is frustrating for those looking to predict the future as next week brings us even more squarely into a data-driven episode for bonds/rates.  The not-so-frustrating thing is that the correction was never very large (downright small, even).

UMBS closed the day up 17 bps at 101.36