Markets calmer today with Producer Price Index closer to expectations

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Published Date 9/14/2022

At 8:30 am ET August PPI m/m expected -0.4% as released -0.1%; yr./yr. expected +8.7% reported at 8.7% and down from 9.8% in July. Core CPI m/m expected +0.3% as reported +0.2%, yr./yr. expected 7.0%, as released +7.3%. Excluding food, energy and services yr./yr. 5.6% from 5.8% in July. There was not much initial reaction to the data, the 10 at 8:45 am still up 4 bps at 3.47% and MBS prices at 8:45 am -28 bps. Lower gasoline prices keeping the overall from increasing more; fuel costs continued to retreat, though an underlying measure of wholesale costs firmed in a sign of persistent inflation in the production pipeline. The index for processed goods for intermediate demand dropped 1.7% month-over-month with about two-thirds of the decrease due to a 5.2% decline in prices for processed energy goods. On a year-over-year basis, the index was up 14.1%.

Two opinions: Jeffrey Gundlach of DoubleLine Capital is worried the Fed will choke off economic growth by raising interest rates too fast. Former Treasury Secretary Larry Summers is among those saying the central bank needs to hike even faster to restore its credibility. Gundlach looking for 75 bps from the FOMC next week; worries that a 100 bp increase is too fast and doesn’t let the Fed see what implications to the economy the recent rate increase will do. Summers saying a choice between a 50 basis-point move and a 100 basis-point one then the Fed should choose “a 100 basis-points move to reinforce credibility”. Swaps traders boosted bets on larger Fed moves yesterday following faster-than-expected US inflation data. The contracts are now fully pricing in a 75 basis-point increase at the Fed’s Sept. 20-21 meeting, while the odds for a 100 basis-point increase rose to more than 25%. Swaps that deliver on the day of the next FOMC meeting (next Wednesday) climbed to as high as 3.19% yesterday, 86 basis points above the current Fed effective rate.

There had been the idea inflation had peaked over the last couple of months, that was destroyed yesterday with consumer prices increasing 8.3% yr./yr. The Fed and almost every noted economist has missed inflation outlooks for a year now, yesterday the 10 yr. note rose to its highest level since the middle of June. This morning it tested 3.47%, the high in June and it has held so far.

MBA mortgage applications last week; -1.2%, purchases -0.2%, re-finances -4.2%.

At 9:30 am the DJIA opened +36, NASDAQ +46, S&P +13. 10 yr. note at 9:30 am +1 bp. FNMA 5.5 30 yr. coupon -17 bps, FNMA 5.0 30 yr. coupon -14 bps. Both the 5.5 and 5.0 coupons unchanged from 9:30 am yesterday.

Technically the 10 yr. note is overbought, rates should hold steady today. The 10 hit its June high this morning at 3.47% and its relative strength is at over bought levels. Looking for some consolidation now. Overall, still very bearish but most of the bearishness has already been discounted in present prices and yields.

Source: TBWS

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