MBS up 28 bps on the morning. Stocks up 10.5.
It’s a characteristically slow summertime Monday morning and bonds are left to trade without any meaningful market movers. Such conditions often result in random movement at opening/closing times for various markets.
US equity futures struggled for traction as soft Chinese price data fueled concern about the outlook for the global economy ahead of key American inflation reports later this week. Equities have been on the back foot at the start of the second half amid concerns economies will buckle under high rates as central banks keep up the fight against rising prices. US Treasury Secretary Janet Yellen said at the weekend she wouldn’t rule out a US recession, noting inflation remains too high.
The Fed Funds futures are pricing in a 92% chance of a 25 basis point hike at the July meeting. The December futures are pricing in a roughly 1-in-3 chance for another 25 basis point hike by the end of the year.
Reprice risk on the day is low, we shouldn’t see big swings today with little in the way of economic data ahead of Wednesday’s CPI inflation report, but there are a lot of Fed speakers out there today flapping their gums. It’s possible that a core CPI number (one that excludes volatile energy and food prices) showing a big drop in inflation could help rates fall back a bit, but the risk isn’t worth the potential reward in my book. We just haven’t seen enough signs that we will get that kind of report yet. Rates are likely to hold in the 7’s for awhile, with the best we can hope for being to touch back to the high 6’s.
The upcoming week will have some important inflation data with the consumer price index and the producer price index. We will also kick off earnings season with the big banks reporting on Friday. Investors will be particularly interested in whether the banks take provisions on their commercial real estate portfolios. Interestingly, we don’t have much Fed-speak despite the fact the the quiet period for the July meeting starts next week.
The market is expecting a 0.3% reading on both core and headline this week on the CPI. The headline is replacing a 1.2% number from last June, while the core is replacing 0.6%. This would make the headline figure decline from 4% to 3.1% on a YoY. And Core to fall from 5.3% to 5%.
Though it won’t actually make life any more affordable.
If we wanted to make the case for anything about the first two days of this week being interesting, we’d be forced to lie. We could say grandiose things that allude to interest rates making some sort of triumphant stand at the castle walls that separate 7%+ mortgage rates and 4%+ Treasury yields from everything lower, but we’re really just waiting to see how Wednesday’s CPI changes the current sideways grind (which is just a narrow range inside a larger narrow range).
MBS closed up 44 bps. Stocks gained 10.5 points