What a great thing to wake up to! UMBS are up 64 bps! S&P futures were up 51.5 as well.
It is an extreme testament to the gravity of this particular CPI report that all it took was a 0.1 deviation from forecast for bonds to see a huge reaction.
m/m Core CPI = 0.2 vs 0.3 f’cast [0.3 prev]
m/m Headline CPI = 0.0 vs 0.1 f’cast, [0.4 prev]
y/y Headline CPI = 3.3% [3.7% prev]
Falling gas prices contributed to the decline, however, transportation and rent continue to be major drivers of inflation with increases of 9.2% and 6.7% respectively.
The NFIB Small Business Optimism Index decreased slightly to 90.7 vs 90.8 last month. 43% of business owners reported job openings they could not fill with transportation, construction and services sectors hit the hardest. 22% of owners reported that inflation was their single most important problem in operating their business with most skeptical about better business conditions in the short run.
In the commentary, the NFIB discusses how we could have such low sentiment when GDP grew at 4.9% in the third quarter. The first explanation is that the growth rate will be revised downward. That is a possibility. However if you look at the components of GDP growth a lot came from inventory build. Inventory buildup is generally what causes recessions in the first place, as companies cut production in order to move the merchandise which triggers layoffs. Given the data about sales and inventory build the fourth quarter is looking to be weak.
The economy has also been supported by government spending, which is often called “junk GDP” since it is largely artificial and doesn’t represent real, sustainable demand.
The Fed Funds futures have taken any further rate hikes off the table. They are forecasting no change at the December and June meetings, and a 28% chance of a cut at the March meeting.
There’s something about CPI releases in November. Last year’s example prompted one of the biggest single-day, data-driven bond market rallies on record. This year’s isn’t far off–a fact made all the more stunning by the mere 0.1% beat (Core monthly CPI 0.2 vs 0.3 f’cast). There are a few ways to try to explain the size of the reaction. On a nitty gritty note, the problematic housing component fell from 0.6 to 0.3. On a more general note, it’s possible the bond market was more interested in “no whammies” than a sweeping reversal of inflationary pressures.
UMBS 6.5 ended the day up 70 bps at 101.11. The 6.0 coupon gained 89 bps. The 5.5 coupon up over a point.