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Listen Live
Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
MBS OVERVIEW
4:40 EST – Our benchmark FNMA MBS 6.00 June Coupon is down -19 BPS with 60 minutes left to trade.
Inflation Nation: Is inflation cooling? No. Is it worse than expected? No. The Headline May CPI MOM reading showed yet another increase, this time by 0.1% vs. est. of 0.2%. YOY, CPI was up 4.0%, which is much lower than April’s reading of 4.9% but that is due to baseline YOY effects. Core CPI (ex food and energy) increased by 0.4% which matched April’s pace and forecasts. YOY, it was up 5.3% vs. est. of 5.2%. Inflation has now outpaced wage gains for the 25th straight month.
Treasury Dump: We had a very strong 30 year Treasury Bond auction at 1:00 that directly pushed your pricing lower (higher rates). $18B went off at a high yield of 3.908% with a bid-cover ratio of 2.52. The auction saw record foreign demand.
On Deck for Tomorrow: PPI, Weekly Mortgage Applications, FOMC Interest Rate Decision, Summary of Economic Projections (dot plot chart) and a live Presser with Fed Chair Powell.
May core CPI inflation month/month +0.4% as expected, year/year core 5.3% as expected and down from 5.5% in April. Overall CPI month/month expected +0.2% increased 0.1% and down from +0.4% in April, year/year expected +4.0% against 4.1% and down from 4.9% in April. The reaction dropped the 10 year note to 3.70% -4 bps, it didn’t last, by 12 pm rates turned and increased; the 10 year note yield broke above its technical resistance at 3.80 and continued to increase to 3.85%, at 3 pm +11 bps and MBS prices down 48 bps. Can’t find a reason why investors turned on rates this afternoon other than yields on the 5-yr note and the 10-yr note approached their respective 200-day moving averages. Does it suggest the Fed won’t pass tomorrow, or are markets disappointed that inflation didn’t decrease more than reported? Markets still expecting the Fed to pause but with ECB scheduled to increase rates on Thursday and fear of the policy stamen and Powell triggered selling that fed on itself.
Recent news that several big hedge funds are selling 2 year notes in anticipation rates are likely to increase may have also weighed on investors once the initial improvements failed. The turn from lower rates to a steady increase began about 11:00 am and increased momentum as rates continued to increase.
Tomorrow the FOMC policy statement and Jerome Powell’s press conference. From what we heard and read the outlook for higher rates after the pause tomorrow would continue to be tepid, some even believing the Fed is finished. The reaction doesn’t equate to that view. Inflation now half of what it was a year ago. Tomorrow morning May PPI data is expected to be quite weak, the recent decline in crude oil and energy prices influenced the data; m/m PPI -0.1% from +0.2%, year/year +1.6% from 2.3%; core m/m +0.2%, year/year 2.9% from 3.2%.
The major event tomorrow begins at 2 pm with the FOMC policy statement and at 2:30 pm Jerome Powell. Weekly MBA mortgage apps at 7 am PPI at 8:30 am.
When the rate market lost momentum it was a surprise for investors and traders, the weak inflation data should have held rates steady at best but once it let go the underlying uncertainty that surrounds US markets these days buying took over with no one having time to assess. The 10 year note at very critical level at 3.83%, is more buying continues tomorrow afternoon the target we have is 4.00% for the note.
