MBS down 17 bps on the open. Stocks gained 19.74

Bonds were already moderately stronger on the day and are extending the gains cautiously so far. Coming in as-expected at the core level is helpful as is the lower-than-expected result for the headline numbers.

y/y CORE CPI = 5.3 vs 5.3 f’cast [5.5 prev]

y/y headline CPI = 4.0 vs 4.1 f’cast [4.9 prev]

m/m CORE CPI = 0.4 vs 0.4 f’cast [0.4 prev]

m/m headline CPI = 0.1 vs 0.2 f’cast [0.4 prev]

** Shelter rose by .6% (8% YoY). Rents rose .5% (8.7% YoY).  Used cars were +4.4% (2nd consecutive month).  Car insurance +.5%.  Energy fell 3.6% with helped.

The 9:30am NYSE open has been an incredibly active time of day for the bond market recently and today is no exception. Selling picked up right after the opening bell, but some credit is being given to the WSJ article that says officials could use the dot plot to signal another rate hike is expected.

Additionally, there was a sharper uptick in selling in the European bond market at the same time.

Jerome Powell has mentioned 3 basic components for inflation – goods, housing, and services ex-housing. The goods issue was driven by supply chain issues in the early days of COVID. That component of inflation is largely finished, and if you look at the ISM reports they pretty much confirm that inventory issues are no longer a problem. The real estate component is likely to fade as the year-over-year comparisons on home prices become much easier.

Finally services ex-real estate are working lower as well.  We are still elevated, but the index is falling rapidly. Services ex-real estate is really a proxy for wage inflation. We have seen layoffs in the tech sector, and job openings are working their way lower. Consumer expectations for inflation are decreasing as well.

While last week’s first-time unemployment claims were at their highest level since the week ending 10/30/21, the rise in continuing claims is more concerning. Currently, 19 states show a 25% Y-o-Y increase in continuing claims, the highest percentage outside a recession since 1990. The long-term average is nine states, and every time that level is surpassed a recession is either already happening or is about to start.

Tomorrow is PPI.  Expecting headline to drop .1% to 1.5% YoY.  Core expected to rise .2% and fall from 3.2% to 2.9%.

Even though CPI came in right in line with forecasts today (core m/m at 0.4 vs 0.4), and even though that was initially worth a small rally this morning, bonds found a way to get rolled up in a snowball selling spree by the end of the day.  What’s up with that?!  The notion of “after additional  consideration, we’ve decided this is bad for rates instead of good” can only go so far, but even when we go hunting for other scapegoats, we only find things like the WSJ article alluding to the Fed’s option to use tomorrow’s dot plot to show the market it’s serious about tomorrow being a true “pause” as opposed to a “pivot” confirmation.

MBS ended the day down 30 bps.  Stocks picked them up though, being up 30 points.

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