I was puzzled by the news stories following the release of data last week, with headline CPI declining to 0.2% MoM and remaining unchanged on a YoY basis from 2.7% as compared to June data, but lower ...
I was puzzled by the news stories following the release of data last week, with headline CPI declining to 0.2% MoM and remaining unchanged on a YoY basis from 2.7% as compared to June data, but lower than survey expectations. More importantly, core-CPI data increased by 0.1% on a MoM basis and rose from 2.9% in June to 3.1% for July on a YoY basis while beating consensus by 0.1%. Headlines suggested that the data was “benign,” which was counter to my initial thoughts as core-CPI ticked higher and further away from the Fed's desired path. As the week progressed ahead of the release of PPI data on Thursday morning, 10-Year Treasury yields revisited the 4.20% area lows experienced following the large and unexpected Nonfarm Payroll revisions earlier this month. The release of PPI data on Thursday morning precipitated a sharp sell-off in rates as core-PPI rose 0.9% MoM and 3.7% YoY. Though it is important to look into the details of the data, concerns about inflation continue to weigh upon the market and factor into the rates picture.
In last week’s commentary, we identified support in the rates market near 4.18% in 10-Yr UST with a pretty meaningful price gap from the Friday of NFP that suggests a target of 4.38% on a sell-off. Though I expected a quicker retracement, the market got more than halfway there last week. Absent a compelling bullish reason for rates to rally, we can expect rates to chop around the current range with a reasonable chance to revisit the 4.38% price target. Identifying and fading a meaningful support level like this is key to capturing trading opportunities in the market and managing interest rate risk appropriately.
The Fed rate cut debate continues to rage, with consensus for a 25 basis point rate cut probability settling near 84% at the end of the week. After the CPI release, the probability rose to 108% and chatter that a 50 basis point cut was likely started to enter the conversation. Following the obviously more inflationary PPI data, however, the expectation fell back below pre-CPI levels. Fed officials remain divided on the topic, with Waller and Bowman supporting a rate reduction, citing some cooling in the labor market. Most other officials seek to maintain a more cautious approach and remain undecided or prefer to keep rates unchanged. Throughout the year, Chair Powell openly professed concerns about inflation and clearly does not want to revisit errors from past Committees that eased too early. Powell likely prefers to avoid easing monetary policy too soon, which could allow inflation to recur, causing the Fed to have to reverse course and become more restrictive as a result.
This week, with a much lighter slate of data, attention will likely focus on Wednesday's release of FOMC minutes. On Friday, we can look forward to any news out of Jackson Hole that may offer some insights from Chair Powell, other FOMC officials, and, of course, titans of industry in attendance regarding the direction of the economy or interest rate dynamics moving forward.
From the Municipal Desk:
Municipal rates experienced less price movement throughout the week but generally followed the lead of the Treasury market. By Friday’s close, the front-end of the municipal curve was 1 to 2 basis points lower; however, in 10-year and longer paper, rates were 1 to 3 basis points cheaper. Activity in municipals was relatively robust, especially following the rally in the rates market after the release of CPI data on Tuesday. The above-average new issue calendar, near $11.5 billion, was well subscribed with deals continuing to be placed and balances remaining limited. A decline in mutual fund flows saw inflows decline from over $1 billion to a much more modest $117 million, keeping the positive inflow streak alive at 14 weeks. This week, the new issue calendar drops dramatically to only $6.7 billion, suggesting that the lighter supply will create some spread and ratio tightening should demand hold steady.
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