Mixed Signals in Data, Events, and The Market Reaction.
The hotly anticipated CPI data came in roughly in line with expectations. Bonds and stocks both rallied initially but then asked themselves why they would rally considering the Fed wouldn’t be any less aggressive in normalizing policy based on this report. The afternoon’s 10yr auction provided the day’s second key test. It produced perfectly decent stats in terms of demand, but by falling very close to current yields, it could be viewed as more of an endorsement of the recent sell-off (as opposed to some beacon for impending rally momentum). Bonds ultimately moved back into negative territory by the close after staying green for most of the day.
Econ Data / Events
Fed MBS Buying 10am, 11:30am, 1pm
CPI m/m …………..0.5 vs 0.4 f’cast, 0.8 prev CPI y/y …………….7.0 vs 7.0 f’cast, 6.8 prev Core CPI y/y ………5.5 vs 5.4 f’cast, 4.9 prev
Market Movement Recap
08:37 AM Brief, initial weakness following CPI data, but now in stronger territory with 10yr yields down 2.4bps at 1.722 and 3.0 UMBS up 2 ticks (0.06).
10:04 AM Giving up some gains with 10yr yields back up to 1.736 after hitting lows of 1.711. MBS are down 3 ticks (0.09) from the highs, but still up just a hair on the day. No major reason for the selling, but it did begin right after the 9:30am NYSE open (a common time of day for momentum shifts).
01:08 PM Very slightly weaker after ho-hum 10yr auction. Still stronger on the day. 10yr down 2.4bps at 1.722. MBS up roughly an eighth.
04:27 PM Harder to notice in 3.0 UMBS, but bonds have been leaking toward weaker levels for 3+ hours now with the 10yr almost back to unchanged (1.74 versus 1.71 lows). MBS are still modestly positive on the day, but 2.5 coupons, for instance, are down more than an eighth from the highs.