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 12:00pm ET. Make sure to register HERE.
Stocks are higher, with the S&P 500 and NASDAQ setting new 52-week highs, while Mortgage Bonds are slightly lower after having a nice initial move higher, following lower CPI inflation data for May.
CPI Inflation Data
The May Consumer Price Index (CPI) report showed that overall inflation increased by 0.1%, which was even lower than estimates of 0.2%. Year over year, inflation declined from 4.9% to 4%, which was lower than the 4.2% expected. Inflation has declined sharply from the 9.1% peak and continues to make progress every month since that peak.
The main focus is the Core rate, which strips out food and energy prices, and it increased by 0.4%, which was in line with expectations. Year over year, Core CPI decreased from 5.5% to 5.3%, which was also lighter than estimates.
Shelter costs rose by 0.6% in May and rose by 8% year over year, which is down slightly from 8.1% in the previous report. Rents rose 0.5% last month and are up 8.7% year over year, down one tenth from the previous report. Owner's equivalent rent, which tries to capture the increase in homeownership costs, rose 0.5% and is up 8% year over year, also falling one tenth. With Rents and OER rising 0.5%, the volatile lodging away from home figure pushed up shelter costs a bit. Lodging away from home rose by 1.8% after falling by 3% last month.
Used Cars rose 4.4% for the second month in a row. Since Used Cars make up 3.36% of the Core CPI Index, it pushed the reading up 0.15%. Motor vehicle insurance rose 2%, and since it makes up 3.26% of the core index, it caused the index to rise 0.7%. Without these two increases, we would have seen core inflation only rise 0.2%, and year over year would have fallen to 5.1% instead of 5.3%. Used car prices are declining according to several indexes, so this should catch up and be deflationary hopefully next month.
Energy prices fell 3.6%, which helped inflation move lower.
Mortgage Bonds initially reacted favorably to the news, but have since moved lower. We will have to see if this is some trading or if the Stock market rally is hogging the investment dollars from the Bond market. The expectations for inflation were low, so even though we saw a big drop, much of it was expected and could also be a reason why Bonds are not reacting to the upside. Core also is declining at a slower pace than the Fed would like.
NFIB Small Business Optimism Index
The NFIB Small Business Optimism Index rose slightly off a 10-year low, but remains at depressed levels.
Plans to Hire did rise 2 points, while the compensation components each rose 1 point. Those that Expect a Better Economy dropped by 1 point to -50 and is just off a record low. Those that Expect Higher Sales weakened by another 2 points to -21 and that is the lowest since last July.
The NFIB said that small business owners are expressing concerns for future business conditions, but until customers stop coming in, they will continue to try to hire workers and increase compensation to attract applicants and retain their current workforce.
30-year Auction
Later this afternoon there will be a 30-year Bond Auction, following yesterday's weak 10-year Auction. We will see if traders show demand for Bonds on the heels of today's lower inflation data.
Tomorrow
We will be getting the Producer Price Index wholesale inflation report, which should be friendly to the Bond Market. Here are the expectations: Headline expected to drop 0.1% and drop from 2.3% to 1.5% year over year.
Core expected to rise 0.2% and to fall from 3.2% to 2.9% year over year.
We will also get the Fed's rate hike decision and Jerome Powell press conference. Almost every is expecting the Fed to skip hiking rates at tomorrow's meeting, but the big question is what they will do in July. We will have to listen closely for their comments and also look at their new projections they will release for the Fed Funds Rate, inflation, the unemployment rate, and GDP.
Technical Analysis
Mortgage Bonds are continuing to battle with the important 99.845 Fibonacci level. The 10-year is trading just above an important ceiling of resistance at 3.77%. Bonds have quietly risen about 150bp over the last few weeks...we will see if they can continue their rally after tomorrow's inflation data and Fed meeting. Begin the day floating.