MBS Live Recap: Inflation Data Throws Down Gauntlet. Markets Panic

It's easy enough to imagine or even expect that near-term inflation spikes are transitory and that it will be a tall order to sustain core annual levels in the 2.5% neighborhood--especially when you're heading into the day with the consensus at 2.3% and the highest forecast at 2.5%.  Things change fairly quickly when the actual number comes in at 3.0%, driven NOT by mathematical factors but instead by a bonafide surge in April (0.8% month-over-month versus 0.2% forecast, and 0.6% in March).  Neither stocks nor bonds enjoyed the news.

Econ Data / Events
  • Fed MBS Buying 10am, 1130am, 1pm

  • Consumer Price Index (CPI, Inflation)
    MONTHLY: ..............0.8 vs 0.2 f'cast
    ANNUAL, CORE: ......3.0 vs 2.3 f'cast

Market Movement Recap
08:42 AM

Bonds were flat overnight as stocks continued drifting lower.  CPI data is the big mover this morning.  Significantly higher than expected, and bonds are reacting logically (and frankly, minimally in our opinion).  10yr yield up 3 bps at 1.649% and 2.0 UMBS are down just over an eighth of a point.

09:57 AM

Another leg weaker in the 9am hour.  Pure momentum move (i.e. carryover from CPI reaction).  MBS down nearly 3/8ths and 10yr yields up more than 5bps.  Some signs that things are leveling off, but too soon to confirm.

01:16 PM

little-changed after ho-hum 10yr auction.  Small initial rally, but now erased and back near highs of day (1.692).  MBS are still 3/8ths weaker.

03:35 PM

Sideways at the same levels all the way through the 3pm CME close.  The only visible development in the past few hours is the acceleration of stock selling pressure (S&P futures down 2% on the day).

04:06 PM

A bit of additional weakness just now--mainly in MBS, and mainly in UMBS 2.0 coupons (now down half a point on the day). 

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