MBS taking a hit early. Down a quarter point in early trading. Stocks down about 9 points.

Bonds were almost perfectly flat in the overnight session as traders scratched their heads trying to figure out why they were still accepting yesterday’s unprovoked sell-off. The higher-than-expected core PPI number prompted some immediate selling (not huge, but obviously correlated).

Core Producer Prices MoM = 0.3 vs 0.2 f’cast [0.1 prev]

Core PPI YoY = 2.4 vs 2.3 f’cast [2.4 prev]

Final demand rose 0.8% y/y; est. up 0.7%

Final demand ex food, energy rose 0.3% m/m: est. up 0.2%

San Francisco Fed Chair Mary Daly said that it is too early to declare victory on the battle against inflation.   Which is interesting because her own Fed (The SF one) believe that shelter costs will decline from 7.8% to 5% by November.  Then go negative by May 2024.   Shelter is 43.6% of the Core number.  It’s been 2/3 of the inflation we have seen.

Consumer sentiment was flat in July, according to the University of Michigan Consumer Sentiment Index. Inflationary expectations ticked down from 3.4% to 3.3%. Long-term inflationary expectations remained at 2.9%, which is above the pre-pandemic range of 2.2% – 2.6%.

We could see another bout of snowball selling where bad turns to worse. Bonds are testing the worst levels we saw a couple of weeks ago, and it is tough to see them getting much worse from here without help from something.

This week was supposed to be all about CPI confirming or rejecting the notion that core inflation was finally falling into line.  A reading at or below the forecast would ostensibly have done that, but bonds managed to sell off abruptly that same afternoon.  Now today, a modest 0.1% beat in Producer Prices (a far less relevant report) resulted in additional selling.  One might be forced to conclude that the selling is happening for reasons that transcend the data despite the persistent cries of “data dependent” from the Fed and those who hang on their every word.

MBS closed down at quarter point.  Long boat to “same as this morning”.  Stocks pretty much flat