Sorry everyone – I think I jinxed us. After 2 days of being sarcastic about opening to gains – we are opening to a loss in about the amount of both gains. My bad.
MBS down 36 bps on the open.
Other than divine retribution – Bonds were a tad stronger in Asia, but lost ground steadily in Europe to open the US session a few bps higher. The first move was into even weaker territory at first, but with some hints of ground-holding. The ground-holding could merely be a mini wave of short covering before more selling, so we’re not assuming resilience remains, but it’s better than a sharp stick in the eye for now.
Core PCE Prices m/m= 0.6 vs 0.4 f’cast [0.4 prev]
Core PCE Prices y/y= 4.7 vs 4.3 f’cast [4.6 prev]
prev month revised up 0.2
Personal spending, after adjusting for changes in prices, jumped 1.1%, rebounding from weakness at the end of last year.
It was also the highest reading since June of 2022.
The March Fed Funds futures are now handicapping a 1-in-3 chance for a 50 basis point hike at the March meeting. Note that we will not get the February PCE numbers until after the March meeting, but we will get another look at CPI / PPI.
New Home Sales rose 7.4% MOM to a seasonally-adjusted annual rate of 670,000. This is still down 19% on a year-over-year basis. The median home price was flat on a year-over-year basis to $427,500. The average price fell 5.3% on a YOY basis.
The personal income and outlay number above were confirmed by the University of Michigan Consumer Sentiment Survey. Consumer sentiment rebounded strongly in January, both on a month-over-month basis and an annual basis.
Soft landing? Hard landing? Now there is talk of expecting a “no landing” for the global economy, in which economic growth holds steady and inflation remains high. This scenario would result in tight financial conditions for longer and could weigh on government debt and risk assets. Economists surveyed by Bloomberg expect the Federal Reserve’s peak interest rate to be higher than what had been projected, after recent data showed inflation had remained high. The economists expect policymakers to raise the federal funds rate to a peak of 5.25 percent and hold it there through year-end. Via robchrisman.com
PCE Inflation data has been relegated to an “occasional and modest” market mover in the current environment. Traders have been doing whatever they need to do in response to the comparable CPI data that comes out much earlier in any given month. But exceptions are made for PCE data that sings a decidedly different tune, such as today’s. It matched a decades-high reading at the core level (month-over-month) and thus sent yields higher. Despite the unpleasant motivation and the 10yr almost hitting 4.0%, things definitely could have been worse. If traders were determined to squeeze rates highs as fast as possible, it didn’t show up in today’s fairly moderate selling pressure (not to mention the afternoon recovery).
With 23Q1 earnings season almost over, it appears net profits for S&P 500 firms will be 11.3%. While this would be the sixth straight quarterly decline, and well down from their 21Q2 13% peak, it returns profits to where they were in CY2019. Despite higher sale prices, elevated labor, materials, and energy costs are being felt. Lower profits could lead to reduced corporate investment, lower investor payouts, and layoffs.
Common Sources and influences
- Brian Levy
- Daily NMP from ambizmedia
- The National Real Estate Post
- George Meillarec @ Loop Capital (often via Bloomberg)
- Bank of Oklahoma MBS traders, Chris Maloney
- MCT Daily Market Commentary