MBS are up 53 mighty basis points in the AM. Stocks up 44 points

A 0.2% “miss” in core CPI is one of the better eventualities that bonds could have hoped for today. All that remains to be seen now is how big of a rally it will sustain. So far, it’s been good for an instant drop.

M/M Headline CPI = 0.2 vs 0.3 f’cast [0.1% prev]

Y/Y Headline CPI = 3% vs 3.1% f’cast [4.0% prev]

M/M Core CPI = 0.2 vs 0.3 f’cast [0.1 prev]

Y/Y Core CPI = 4.8 vs 5.0 f’cast [5.3 prev]

Shelter was the biggest contributor to the index, accounting for 70% of the increase, while energy was the biggest drag. Shelter rose 7.8% year-over-year. Home prices peaked in June of 2022, so the YOY increases will go flat starting with next month’s report.   Used Cars fell .5% after rising 4.4% for 2 consecutive months.  Should be more declines coming.  Car insurance rose 1.3%.  Food prices were flat at +0.1%.  Airlines fares dropped 8.1%.

The report didn’t have much of an impact on the July Fed Funds futures, which still see a 92% chance of another 25 basis points. All of the Fed-speak seems to indicate that the central bank will hike rates next week.

Reprice risk on the day is moderate, any time we see a lot of movement early there is a risk that we could see a turnaround as the day goes on. The outlook now a bit better than last week, at least for the moment. Cautious Float. It’s not that big of a beat.

Today’s CPI data serves the important role of pushing back on the narrative of troublingly persistent inflation.  The 0.2% month-over-month level, after all, annualizes to 2.4%.  If that level were to be maintained, the Fed would be in a position to declare victory on inflation and rule out additional rate hikes.  The market’s takeaway seems to be that CPI takes one of the two additional rate hikes off the table, but that is wasn’t enough to alter the course for the upcoming meeting.  From a technical standpoint, bonds rallied enough to undo all of last week’s damage.

MBS closed up 75 bps.  Stocks gained 33 points

While equities have so far enjoyed a banner 2023, firms that recently went public are struggling. Class of 2020 IPOs are down an average of 34% from their initial listing price, 2021 IPOs are down 46%, and 2022 IPOs are off 49%. Relatedly, traditional IPOs (excluding SPACs) have so far raised $9 billion this year, well down from $87 billion in 2021, $24 billion in 2020, but up from 2022.