Markets stable as inflation meets expectations

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Published Date 10/1/2021

This morning the current inflation reading from the PCE +0.4% which was the same reading as July's, it was expected to be +0.3%; core PCE +0.3% unchanged from July but a tick higher than 0.2% estimates. Yr./yr. PCE 4.3%, estimates +4.2%. Inflation holding and not increasing. Personal income +0.2% with forecasts of 0.3%. Personal spending increased more than thought, +0.8% with forecasts of +0.6%. Overall the data about what was expected. Prior to the release early this morning the 10 fell to 1.48% -4 bps from yesterday, after the 8:30 am ET data the 10 held at 1.49% and early trade in MBS markets +6 bps from yesterday.

Inflation in the euro-zone increasing slowly, not unlike what we have here in the US. The ECB’s Christine Lagarde reiterated this week that she considers the current spikes to be “largely transitory,” cautioning against overreacting and prematurely tightening monetary policy. Some of her colleagues have voiced concerns that official forecasts will prove too low, though most still expect price growth to slow eventually. Central banks sounding the same and using the now canonized “transitory” definition. Eurozone's September CPI was up 0.5% m/m (last 0.4%) and up 3.4% yr./yr. (expected 3.3%; last 3.0%). September Core CPI was up 0.5% m/m (last 0.4%) and up 1.9% yr./yr. (last 1.6%).

Congress passed a stop gap funding bill that will keep Treasury from defaulting until Dec 3rd. The legislation was hastily passed by both chambers of Congress and keeps funding levels for government departments and agencies flat until Dec. 3. Had it not been approved, parts of the U.S. government would have begun suspending operations today. The measure, however, doesn’t include a provision sought by Democrats to suspend the nation’s debt limit, after Republicans in the Senate blocked a version of the bill that included the debt provision.

At 9:30 am the DJIA opened +243, NASDAQ +48, S&P +22. 10 yr. at 9:30 1.49% -3 bps from 5 pm yesterday. FNMA 2.5 30 yr. coupon +5 bps and +31 bps from 9:30 am yesterday.

At 10 am the Sept ISM manufacturing index, 61.1 against 59.5, best since June. U. of Michigan consumer sentiment index, expected 71.0 jumped to 72.8. August construction spending expected +0.4% reported at 0.0%.

Bitcoin and other cryptocurrencies rallied hard this morning on comments yesterday from Jerome Powell saying he had “no intention” on banning cryptocurrencies. He did, however, add that stable coins might be appropriate for regulation.

Technically, the improvement in the 10 yr. note the last four sessions is what we expected. There is no immediate change in the wider bearish view; to erase the bearishness the 10 yr. has to fall to below 1.44%, a big decline from resent levels and fundamentally there will have to be a major change in the current inflationary fears that have escalated since the FOMC meeting last Thursday. The 10 has found support at 1.55% as we expected, a short term target.

Source: TBWS

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