Wednesday – December 11, 2024
UMBS opened UP 13 bps this morning. S&P futures up 21 points.
Bonds have already rallied from 4.25 to 4.215 in the wake of the CPI data, and that’s a testament to the market’s level of interest in today’s data. We can only imagine how big the reaction would be if there were a big departure from expectations. Even the unrounded core m/m level was less than 1/100th of a percent from forecasts.
If anything is tipping the scales in the favor of this bond rally, it’s the resumption of the trend lower in the shelter component.
Core M/M CPI = 0.3 vs 0.3 f’cast, [0.3 prev]
unrounded, 0.308
Core Y/Y CPI = 3.3 vs 3.3 f’cast, [3.3 prev]
Shelter CPI M/M = 0.336 vs .382 prev
Food was a big driver of the increase, rising 0.4% MOM. Energy helped pull down the index. The index for shelter rose 0.3%.
Overall, the CPI reading probably doesn’t change the Fed’s thought process going into next week’s FOMC meeting. The Fed Funds futures agree, seeing a 25 basis point rate cut as basically a sure thing.
The median asking rent fell 0.7% YOY to $1,595, according to research from Redfin. Some erstwhile high-flying MSAs like Austin TX reported the biggest decreases, while the lagging MSAs like Cleveland OH saw the biggest increases. Austin rents fell over 12% on a YOY basis. Tampa, Raleigh and Nashville reported big decreases as well.
It was a day for “explanations” in the bond market with the morning rally needing to be explained in the context of CPI data that came in right on the screws and a subsequent sell-off that also seemed to happen for no apparent reason. In fact, selling continued even after the well-received 10yr Treasury auction. To some extent, the AM selling can be tied to the Bank of Canada announcement, which was universally panned as ultra-hawkish (despite a 0.50% rate cut).
The continued selling is more mysterious and can only really be explained with curve trading and repositioning following the AM CPI data. The big clue: Fed Funds Futures for next week rallied and never sold off. But the farther one moves into the future, the bigger the reversal became. Bottom line, traders sold long term bonds to buy the shortest term debt and the buying hasn’t even necessarily taken place yet.
UMBS closed the day down 15 bps at 99.81.