Markets experience major setback on higher than expected CPI

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Published Date 4/10/2024

The day the world awaited, March CPI. Prior to the 8:30 am ET release the 10 year note traded down 2 bps, MBS prices were up 5 bps. Stock indexes were flat.

March CPI overall expected +0.3% month/month increased 0.4%, year/year overall +3.5% as expected but up from 3.2% in February. The core CPI month/month reported +0.4% unchanged from February but up from forecasts at 0.3%; year/year core expected +3.7% increased to 3.8% unchanged from February. The reaction was swift and deep, the 10 year note increased 13 bps to 4.50%, stock indexes in future trading declined, the DJIA initially -460. MBS prices on the reaction -23 bps. This report confirms what we have noted a few times previously, inflation isn’t on a downward path, it is stuck, and the Fed must re-think what to do, and it is not just inflation. March inflation has increased the last three months and is the highest since last September.

The Fed must relax, accept that inflation isn’t going down, holding back rate cuts may be adding to inflation increases. Goes against all market logic but maybe the Fed should think about accepting 2.0% inflation target isn’t likely, be willing to accept it and cut rates, that may help bring inflation lower, counter to historical logic. High rates may add to inflation as prices increase to offset interest rate pressures. Based on CPI core inflation running at 3.8% if the Fed holds to 2.0% target rates there won’t be any cuts this year and run the risk of flipping economic growth. Realize that view is well off the consensus but in the real world now inflation is not slowing.

Tomorrow the ECB will meet, not expecting a rate cut but Europe’s inflation is slowing, expectations presently is the ECB will imply it is preparing to lower rates, while in the US the Fed remains content to keep rates high, looking for 2.0%. Based on today’s CPI that will be a long time coming.

No one is talking about the US debt and its impact on rates, servicing the debt that is now $1.4 trillion will by itself keep rates higher than otherwise. This afternoon Treasury will report the March budget, expected -$340B, February monthly deficit -$296.3B.

At 9:30 am the DJIA opened -393 after trading down 400 points in pre-opening trade, NASDAQ opened -208, S&P -61. The 10 year note at 9:30 am 4.48% +11 bps, the high 4.50%. FNMA 6.0 30 year coupon at 9:30 am -52 bps from yesterday’s close and 52 bps from 9:30 am yesterday.

Weekly MBA mortgage applications this morning, the Market Composite Index, a measure of mortgage loan application volume, increased 0.1% on a seasonally adjusted basis from one week earlier. The Refinance Index increased 10% from the previous week and was 4% higher than the same week one year ago. The Purchase Index decreased 5% from one week earlier. The unadjusted Purchase Index decreased 4% compared with the previous week and was 23% lower than the same week one year ago.

There is a lot more coming today; at 1 pm Treasury will sell $39B of 10 year notes after a very soft 3 year auction yesterday. At 2 pm the FOMC minutes from the March meeting and Treasury will report the budget for March.

Tomorrow PPI, the ECB, weekly claims and a 30 year bond auction. A lot of re-thinking today after the CPI this morning.

Source: TBWS

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