With essentially nothing on the economic calendar on Monday, the most notable headline for the bond market has been the announcement of at least 13 new corporate bond offerings. Why would we care? There are several reasons. At the simplest level, corporate bonds compete for investor attention with MBS. They can also result in Treasury selling as a part of the hedging process. The impact of Monday’s issuance glut is compounded by the looming Treasury auction cycle and the looming CPI report at the end of the week.
The importance of this CPI reading cannot be overemphasized. With the past two instances of this data showing stubbornly high core inflation, we continue to wait for the first real evidence of a shift lower. How will we know it when we see it?
Markets are accustomed to placing emphasis on the CORE ANNUAL inflation number. That’s the one that the Fed would like to see centered on 2% over time. That number is currently running in the mid 6% range, so we’re definitely nowhere close to the target level. Even so, it would be good enough for markets and the Fed if there were compelling evidence that we were headed back in that direction. Because annual inflation includes all of the high readings of the previous 12 months, that number will drop much more slowly than the monthly trend.
CPI-watching is all the more interesting these days due to the extreme prevalence of one particular month-over-month reading. Core monthly inflation came in at 0.6% no fewer than 8 times since the start of the pandemic, and 5 of those have been in 2022. No other level has been even half as prevalent. In annualized term, 0.6% represents a 7.2% core inflation rate–well over the current 6.6% level. The 2 most recent reports both came in at 0.6%, making it even more of a line in the sand–one that can help us identify a turning point.
Long story short, we need to see 2 consecutive months with the core m/m reading under 0.6. The farther below, the better–especially if it’s below the previous 2022 low of 0.3. We probably won’t see that this week (the forecast is for 0.5), but any move in that direction will be critical in helping the bond market hold below the long-term ceiling rates/yields seen in late October.
In addition to the outright ceiling at 4.34%, 4.24% is equally important. It has seen more activity as a ceiling in terms of closing levels and intraday bounces.