Current position: Continue Floating
Stocks and Bonds are both higher to start the day. It was a wild ride yesterday - CPI inflation came in hotter than market expectations, as we anticipated, and initially, all of the markets sold off sharply. At one point, Mortgage Bonds were down roughly 135bp, but they were able to turn the beat around and claw back almost all of their losses. Part of the reason was the developing story in the UK, but also the thought that investors believed the selling was overdone and the worst of inflation is behind us.
After yesterday's hot CPI print, the Fed Futures, which tries to anticipate what the Fed will do at the November 2 meeting, are pricing in a 96% chance of a 75bp hike and a 0% chance of 50bp. Looking to the December 14 meeting, there is now a 68% chance of a 75bp hike.
Back to the UK story - The Prime Minister of the UK, Liz Truss, appears to have done a reversal on the UK's unfunded tax cut plan as the Bank of England is ending its bond-buying support. As a result, the 10 - year Gilt - which is the UK equivalent of our 10 - year Treasury, is rallying and yields are moving sharply lower today after a big drop yesterday. This is causing Bond markets in other European countries to rally as well, and that has spilled over to a bounce in the US.
Cass Freight reported that implied freight rates, or the cost to deliver goods across the US, rose 1% in September and are up 16% year over year. However, Cass stated that the supply/ demand balance in US trucking markets has loosened significantly this year and as a result freight rates are leveling off and set to slow sharply in the months to come. Shippers are not seeing any real savings yet, but they anticipate considerable cost relief next year, which will help to drive inflation lower. This will coincide with much tougher inflation comparisons from last year going forward and is another reason why we feel peak inflation may be in.
Next week's news is housing centric, with the NAHB Housing Market Index, Housing Starts and Permits, and Existing Home Sales.
Mortgage Bonds are now trading in a wide range between the low from yesterday and overhead resistance at 99.54. The 10 - year, after setting a new interim high of 4.075% yesterday, is now back down to 3.94%. Both Mortgage Bonds and the 10 - year are in wide ranges where they are susceptible to big price swings, so we have to remain on guard. Continue floating.