CPI unexpectedly drops

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Published Date 6/14/2017

Two economic reports at 8:30 AM EDT, both weaker than expectations and both very critical data points. May CPI -0.1% weaker than 0.0%, the core excluding food and energy expected +0.2%, +0.1% as reported. Yr./yr. overall CPI +1.9% and ex-food and energy yr./yr. +1.7%. Inflation based on this report is less than the May PPI yesterday. The big shock (and bullish for interest rate markets): May retail sales. They were expected to have increased 0.2%, as reported down 0.3%; excluding auto sales expected +0.2%, as reported also down 0.3%. We are not unusually surprised with the weakness; we have noted a number of times consumers are not as enthusiastic about spending as what is believed by the elites in New York and Washington. That said, we admit we weren’t expecting that much of a miss. The reaction to the two reports increased MBS prices +27 bps from yesterday and drove the 10-yr. yield down 5 bps to 2.16%.

Not only the weak data at 8:30; as you know by now a shooting at a ballpark where Republican House members were practicing for the annual game between GOP vs Dems. According to preliminary reports, 20 to 30 shots were fired, hitting Capitol police and Congressman Majority Whip Steve Scalise (LA). No deaths. The shooter appeared to be a white male, "a little bit on the chubby side," Representative Mo Brooks told CNN, adding that he only saw the man for a second. Brooks said he heard 10 to 20 rounds from the gunman's rifle before the security detail returned fire. He said there were 20 to 25 at the practice in Alexandria, Virginia when the gunfire erupted. After individual attacks in the UK, it has now hit here and is fueling some safety moves to Treasuries. The data released, though, was a big boost to rate markets.

The FOMC this afternoon, and Yellen’s press conference. The surprisingly weak May retail sales and low inflation reads on CPI are increasing the thought that the economy isn’t what the Fed and most believe it is. Consumer spending accounts for about 70% of GDP growth and the weakness in spending that has been the case all this year may give the Fed reason to rethink about another rate increase this year after the increase today.

Earlier this morning, weekly MBA mortgage applications were reported. Apps overall +2.8%, purchase apps -3.0% while re-finance apps +9.0. The decline is a result of heavy adjustments for the Memorial Day holiday in the prior week. The unadjusted purchase index increased 19 percent from the prior week to a level 8 percent higher than the same week a year ago. Refinances were at the highest level since November last year. The refinancing share of mortgage activity to 45.4 percent, up 3.3 percentage points from the prior week.

At 10:00 April business inventories, expected -0.1% were down 0.2%; a negative for GDP calculations.

There has been a lot of talk recently that with unemployment at 4.3% it is bound to increase wages. It isn’t happening and most likely will not meet those forecasts of wage growth and the intended inflation increases that are baked into the equity market cake. The bond market recently suggesting that inflation isn’t a sure thing; interest rates declining on weakness in the dollar but bond investors not worried about inflation pressures. Not sure how the Fed thinks; we may know something from Yellen this afternoon, although the Fed is in Pollyanna mode, so whitewashing reality will likely continue. The Fed cannot endorse anything that is negative to the economic outlook. No Fed can, as was evidenced in 2007 when the collapse happened.

Source: TBWS

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