Current position: Floating
We will be having an interview with Mike Wilson from Morgan Stanley, who is regarded as Wall Street's best analyst, on Wednesday at 12:00 p.m. ET. Make sure to register HERE.
Stocks are higher and mortgage bonds are slightly lower ahead of a very important week that we expect to be bond-friendly.
Tomorrow morning, the Consumer Price Index inflation report for May will be released. Here are the previous readings:
Headline: 4.9% year over year
Core: 5.5% year over year
The market is expecting the headline reading to come in at 0.2%, which will replace a 0.9% reading from last year. This would make the year-over-year inflation reading drop from 4.9% to potentially 4.2%, which would be a significant drop.
The core reading is expected to come in at 0.4%, replacing a 0.6% reading from last year. This would result in the core year-over-year figure dropping from 5.5% to 5.3%.
As we mentioned previously, oil prices, used cars, and shelter costs should help bring inflation down. A sharp drop in inflation should be helpful for rates. We also expect another big drop next month.
On Wednesday, the Producer Price Index report will be released, which measures wholesale inflation. The headline is expected to drop from an already low 2.3% to 1.5%. The core is anticipated to fall from 3.2% to 2.9%. This should also be beneficial for bonds.
Tomorrow kicks off the Fed's 2-day meeting, with their rate hike decision on Wednesday at 2:00 p.m. ET. The Fed will have the benefit of seeing CPI tomorrow and is expected to "skip" hiking rates this meeting. It's important to note that this does not necessarily mean "pause". A pause would infer that the Fed has already seen a change and that the next move would be a cut. Skip means that the Fed is going to give themselves more time to assess the data and that they plan to hike at the next meeting on July 26 unless they see something change, like weaker jobs and a continued decline in inflation.
It will be important to dissect their language and the Powell press conference.
Later this afternoon at 1:00 p.m. ET, there will be a 10-year Treasury Note Auction. With expectations for a much lower headline CPI print, it would be reasonable to believe that traders may have an appetite for yields at 3.75% before potentially falling tomorrow, as inflation should come down. It will all come down to the demand for treasuries at auction. We will update you with the results in the market news section of the website.
Wednesday: PPI, Fed Meeting
Thursday: Retail Sales
We expect Thursday's Retail Sales report to be weaker and less bond-friendly.
Mortgage bonds are continuing to battle with the important 99.845 Fibonacci level. The 10-year is trading just beneath an important ceiling of resistance at 3.77%. With an important week ahead that we expect to be bond-friendly, we can begin the week floating.