MBS woke up on the Positive side of the bed, being up 19 bps. Stocks gaining 46 points early.

Core CPI m/m = 0.2 vs 0.2 f’cast [0.2 prev] Core CPI y/y = 4.7 vs 4.8 f’cast [4.8 prev] Jobless Claims = 248k vs 230k f’cast [227k prev]

The annual number can miss its forecast even as the monthly number hits due to rounding. Just like last month, the monthly figure was under 0.16% before being rounded up to 0.2%, so inflation is a bit softer than the 0.2% headline suggests. Either way, bonds like it, or at least they don’t dislike it.

You can see the CPI sub-index for shelter working its way lower, and it is almost back to pre-pandemic levels. The Fed’s fear is that a pause will re-ignite home price appreciation, which will exacerbate the affordability problem and push inflation higher. Energy prices rose 0.2% – and probably going to get worse. Insurance is up 2% (17% YoY)

The September Fed Funds futures continue to increase the odds for a pause. The futures see a 10% chance of another rate hike in September. The odds of a rate hike by the end of the year are 25%.

30 yr auction was met with below average demand. Was graded a C-. Bid to cover was 2.42 was slightly above average. Direct and indirect bidders took 87.4% of auction vs 88.8% average.

Today was CPI day and bonds lost a lot of ground. So was CPI to blame? No… CPI was actually pretty much in line with expectations and bonds traded sideways for the next few hours. Then the Fed’s Mary Daly said the Fed has “more work to do on inflation.” Did she spook bonds? Not really… There was a bit of weakness surrounding her comments, but yields clearly stabilized ahead of the 30yr auction. Big selling followed the 30yr auction, so what that the market mover? No… That selling didn’t begin until almost 20 minutes after the auction. Even then, the auction stats themselves were right in line with prevailing averages, so there was no justification in the auction details (never mind the fact that 7yr Treasuries had a worse day than 30s).

In net, MBS lost 47 bps on the day. Mostly in the afternoon. Stocks were flat