Rates flat as consumer prices come in slightly less than expected

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Published Date 9/13/2018

Prior to 8:30 am EST data, the stock indexes were better. The 10-yr note rate was at 2.98%, up +1.5, and MBS prices at 8:15 am dropped -6 bps from yesterdays close.

At 8:30 am August CPI resembled yesterday’s PPI, lower than forecasts. Overall CPI was expected to be +0.3%. As released it was +0.2%; yr/yr. CPI thought to be +2.8% was up just 2.7% and down from 2.9% in July. Core CPI, which was expected to add +0.2%, was up just 0.1%; yr/yr +2.2% with forecasts of 2.3% and down from 2.4% in July. A contraction in medical costs and apparel and only a marginal increase in food all held down consumer prices in August in data that gives the Federal Reserve some breathing space as it focuses on the rise of wage inflation. Housing makes up more than 40% of the index, and here the results do show some traction, up 0.3% in the month for a 2.9% rise from this time last year. Wages still a main focus for the Fed although so far they are not moving up as was the general belief since the tax cuts early this year; nevertheless the Fed isn't likely to ignore the risk.

Weekly jobless claims were thought to be +7K to 210K, as reported claims the prior week were revised from 203K to 205K; this week 204K, -1K from the revision. Claims, as we've noted the last couple of months, are not much of a factor with so many jobs available. It is another 50-yr low for claims. Over the next few weeks claims are likely to increase but will be seen as temporary, resulting from Florence.

At 9:30 am the DJIA opened +117, NASDQ +48, S&P +11. The 10-yr at 9:30 am was at 2.95%, -2 bps from yesterday. Prior to the CPI data the 10-yr traded at 2.98%, +1 bp.

Three central banks met today; the ECB as expected left its interest rates unchanged but said it was staying on track to end bond purchases this year and raise interest rates next autumn (2019), even as protectionist moves around the globe slow down growth. Mario Draghi expressed confidence on wage growth and the outlook for inflation. The Bank of England also left rates unchanged also as expected. Turkey’s central bank raised its benchmark interest rate by the most since Erdogan came to power 15 years ago. The one-week repo rate went up by 625 basis points to 24%, twice expectations.

Florence has weakened to a category 2 hurricane from a 4, so expected damage isn’t likely to be as severe as what was widely expected. However, forecasters are still calling for 30 inches of rain, down from the 40 inches predicted yesterday.

Yesterday the US made an overture to China to resume trade talks ahead of President Trump’s application of tariffs that could total $467B. So the US is waiting for response.

At 1:00 pm the Treasury will sell $15B of 30s, re-opening the August quarterly refunding issue. Yesterday the 10-yr saw strong bidding.

At 2:00 pm the Treasury will report the August monthly budget. Forecasts call for a drop of -$178B for the month as the US debt explodes. At 4:30 pm the Fed is scheduled to report its balance sheet; +$4.208 trillion, weekly change -$10.4B.

As noted above, the bond and mortgage markets got a boost on the CPI headlines, but by 10:00 am EST most of the minor improvements are gone. The dollar valuation isn’t helping, weakening this morning. MBS prices at 10:00 am are down 5 to 7 bps from 9:30. The 10-yr dipped to 2.95% at 8:30 on CPI at 10:00 2.96%, unchanged. 3.00% is a rock and won’t give way easily with the Fed poised to increase rates in two weeks and many still looking at another increase in December. There's a lot of talk about the yield curve about to invert. Historically that signaled a coming economic slowing, but we doubt that will happen this time; history mostly went out the window in 2008 when central banks took over and began active management of rates to avoid a depression. That said, we’ll go with our bearish models for now; as noted there is minor support at 3.00%.

Source: TBWS

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