Current position: Floating
Stocks and Mortgage Bonds are both higher but vacillating after inflation moderated once again, in line with estimates.
The inversion between the 10-year Treasury Note Yield and the 3 - month Treasury now stands at 100bp, a sure sign of a recession.
CPI (Consumer Price Index)
The December Consumer Price Index (CPI) report showed that overall inflation decreased by 0.1%. Year over year, inflation declined from 7.1% to 6.5%. Both of these figures were right in line with expectations. If you took the last three readings and extrapolated them over the next 12 months, the run rate would be 1.6%.
The main focus is the Core rate, which strips out food and energy prices. It increased by 0.3%, while year over year the index decreased from 6% to 5.7%. Both of these figures were in line with estimates. If you took the last three readings and extrapolated them over the next 12 months, the run rate would be 3%.
Shelter spending rose by 0.8% and is now up 7.5% year over year, which is an increase from the previous 7.1%. Rents rose 0.8% last month and are now up 8.3% year over year, which is up from 7.9%. Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job, rose 0.8% and is up 7.5% year over year, up from 7.1%. While the CPI shelter costs are still catching up and adding inflationary pressure, real shelter costs have been coming down. Because shelter makes up 39% of Core CPI, it was the main cause of the 0.3% monthly gain... but imagine when this catches up and starts to add deflationary pressure. We think this may happen in the February reading, and we will get that report in March.
Looking at more of the internals: energy prices fell 4.5% from a month ago, bringing the annual gain to 7.3%.Gasoline prices fell 9% and are down 1.5% year over year.
Food prices, which make up 14% of the CPI, climbed 0.3% in December, bringing the year-over-year gain to 10.4%.
Auctions
Yesterday's 10-year auction was pretty good, helping Bonds rally into the close. Later this afternoon at 1:00 pm ET, there will be a 30 - year auction, and with inflation continuing to roll over, we hope there is strong demand. If there is, it could help propel Bonds further.
Initial Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 1,000 to 205,000. Continuing Claims, or those that continue to receive benefits after their initial claim, fell 63k to 1.6M, but are still up 300k over the last few months. We did see a big spike in the jobs report for part-time jobs and second jobs, which could be the reason for these figures. Also, the continuing claims are from 2 weeks ago, which was during a holiday week.
Technical Analysis
Mortgage Bonds are still trading in a range between support at the 25-day Moving Average and overhead resistance at 101.671. Bonds tested both support and resistance today, showing how much prices are vacillating. If we get a good auction this afternoon, it's possible that bonds can finally break through this tough ceiling.
The 10-year is trading at 3.52% after getting as low as 3.46%. Yields are in a very wide range, with room to move lower until reaching 3.43%. Continue Floating.