Current position: Carefully Floating
Stocks and mortgage bonds are both lower to start the day ahead of an important week.
We have been highly anticipating the May 10th CPI report, where we get the April inflation readings, thinking that it would be the start, not the destination, to when shelter costs would begin to catch up and help inflation move lower.
Since we made our call at the beginning of the year, there have been a few things that have changed. The BLS adjusted last year's April 2022 figures lower, which will make it harder to make progress on year-over-year inflation. Additionally, oil prices spiked in the first 2/3 of April when OPEC+ announced a production cut, which will work against us. Some analysts also believe used cars, apparel, and car insurance will add inflationary pressure. We have started to see shelter costs crest and add less inflation pressure, but these other items will make it hard to make progress.
Here are some of the estimates for Wednesday, including figures from Goldman Sachs and JPM Chase, who are usually pretty good at forecasting the figures:
Headline MOM (current 5% YoY)
Goldman 0.5%
JPM 0.5 %
Market consensus 0.4%
2022 replacement 0.4%
Core MoM (current 5.6 % YoY)
Goldman 0.47 %
JPM 0.43 %
Market consensus 0.4%
2022 replacement 0.47%
Based on these numbers, we may not see much progress, if any, on May 10. The adjustments to last year's figures and the oil production cut were unforeseen when we made our call at the beginning of the year, and it appears it may take a little more time before seeing inflation really start to move lower. It's important to note that we still believe inflation and rates will move lower in the second half of the year, but not as early as we had previously thought.
Week Ahead
Tuesday: NFIB Small Business Optimism Index
Wednesday: Mortgage Apps, Consumer Price Index, 10-year Auction
Thursday: Producer Price Index, Initial Jobless Claims, 30-year Bond Auction
We have seen meaningful progress on producer inflation, which has moved lower from 11.7% to 2.7% and is expected to drop even further to 2.5% on Thursday. This could help bonds, although it does not get as much respect as CPI.
The 10-year and 30-year auctions can also be important, depending on the level of demand. If traders feel the US is headed into a recession and yields will drop going forward, we could see a lot of participation, which would help bonds.
Technical Analysis
Mortgage bonds have broken beneath several layers of support and are now in a new range between support at the 50-day moving average and a quadruple level of overhead resistance. The 10-year is now trading around 3.5%, with the important 200-day moving average above at 3.54%. The 200-day should provide some resistance to prevent yields from moving higher. Begin the week carefully floating.
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