Rates flat after hotter than expected import prices and weaker retail sales
Published Date 5/14/2021
10 yr, before 8:30 am ET, was down-2 bps, MBS prices +10 bps. At 8:30 am April retail sales; expected +1.0% was 0.0% and March sales revised from +9.8% to +10.7%; ex-auto sales forecast +0.8% as reported -0.8%, March revised from +8.4% to +9.0%. Excluding autos and gas estimate +0.7% reported -0.8%; the April control group thought to be +0.1% dropped -1.5%. More stimulus checks drove the strength in March; in April, the checks were less. Eight of 13 retail categories registered declines in April sales, with the largest percentage decrease at clothing stores. Purchases at restaurants and auto dealers increased.
Also at 8:30 am ET, April import and export prices. Import prices expected +0.6% increased 0.7%; yr/yr import prices +10.6% compared to forecasts of 8.8%. Export prices estimate +0.8% as reported, yr/yr export prices +14.4% up from 9.1% in March.
At 9:15 am ET, April industrial production and factory use; production thought to be +1.2% and factory use 75.2% up frm 74.4% in March. Production +0.7%, factory use 74.9%, manufacturing +0.4% on thoughts of +1.8%.
At 9:30 am ET, the DJIA opened +235, NASDAQ +138, S&P +33. 10 yr 1.64% -2 bps. FNMA 2.5 30 yr coupon at 9:30 am+13 bps and +20 bps from 9:30 yesterday.
At 10:00 M ET, the mid-May U. of Michigan consumer sentiment index forecasted to increase to 90.3 from April’s 88.3; the index fell to 82.8, a big miss; not much initial reaction in the rate markets.
CDC says it’s OK to not wear the mask inside or out and no more social distancing if vaccinated. The fully vaccinated should continue to wear a mask while traveling by plane, bus, or train, and the guidance doesn’t apply to certain places such as hospitals, nursing homes, and prisons. “We have all longed for this moment, when we can get back to some sense of normalcy,” Dr. Walensky said. “That moment has come for those who are fully vaccinated.” Local governments can still require masks. The fewer restrictions and concerns should boost the economic outlook and job growth.
Inflation? Is it real or just a scare? April PPI and CPI both stronger than forecasts, commodity prices climbing, home prices soaring, food prices going higher, and now there is a slow shift in sentiment that wages will have to increase to keep the economy moving forward. On Wednesday, the BLS reported consumer prices rose 4.2%, the first evidence that the increases in producer prices are rolling down the consumer level. The Fed is continuing to push against any potential that prices could get out of hand and exceed its plan of 2.0% inflation that will dissipate later this year, never missing an opportunity to balance inflation fears from escalating. The day before the CPI report (Tuesday), Richard Clarida, vice Fed chair, called April’s consumer price reading “one data point” and said, “I expect inflation to return to -- or perhaps run somewhat above -- our 2% longer-run goal in 2022 and 2023.” The CPI increase must have surprised with its strength. The markets are where we look for answers. Momentarily the rate markets are balancing the inflation news with some skepticism. Rates spiked on Wednesday; no follow-through yesterday or early this morning. The lack of continuing selling is currently tempering the inflation outlook—the 10 yr is trading lower than its high at 1.74% that appeared in jeopardy Wednesday.
Like those three bears, not too hot or cold, just right; it’s what the Fed is counting on. Given the market’s reaction since Wednesday’s hard selling and no continuation, yesterday or today suggests that presently there is no major concern that inflation will drive interest rates higher. The 10 yr can’t even increase to test the April high at 1.74%.
Source: TBWS
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