Markets get a boost on lower than expected Consumer Price Index

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Published Date 6/12/2024

The improvement in rates began yesterday on the very strong 10 year note auction that implied markets were tilting hard for better inflation data this morning on the release of May CPI. CPI didn’t disappoint, the expectations were CPI would be unchanged from April, inflation declined sending rates lower and MBS prices higher. The initial reaction at 8:30 am ET sent the 10 year note down to where it traded prior to the run up in rates due to the May employment report last Friday, -11 bps and MBS prices +40 bps.

CPI month/month expected +0.1% from +0.3% in April declined to unchanged, year/year thought to be +3.4% the same as April hit at 3.3%. The core, excluding food and energy, forecast month/month was +0.3% unchanged from April dropped to +0.2%, year/year estimates +3.5% reported at +3.4% and down from 3.6% in April. Inflation instead of being essentially unchanged from April fell, good news for the markets, rates, and the Fed.

The reaction generated a buzz that the Fed may be able to lower rates two times this year, but it still depends on whether the decline in inflation in May is the start of a trend. The FOMC policy statement and Powell’s press conference this afternoon won’t likely provide additional clarity from what we have heard from the Fed in past FOMC meetings. Along with the policy statement markets will get the Fed’s quarterly forecasts on employment, inflation, and GDP outlooks. Will the Fed cut rates with inflation based on today’s report still 1.4% above the Fed’s target? The ECB last week cut its rate with inflation above the same 2.0% target.

The decline in rates started yesterday with a very strong response for the $39B 10 year note auction, the strongest demand since 2022. Rates globally declined yesterday partly on the potential of turmoil in France over who will continue to lead the country. Friday’s employment data, way off the charts in terms of job growth still lurks, the increases in jobs doesn’t equate to other job measurements, job openings declining not increasing.

At 9:30 am the DJIA opened +333 on better CPI, NASDAQ +164, S&P +49. 10 year note at 9:30 am 4.29% -12 bps; FNMA 6.0 30 year coupon at 9:30 am +41 bps from yesterday’s close and +57 bps from 9:30 am yesterday.

Financial markets will trade in narrow ranges until this afternoon’s FOMC statement, Powell’s press conference and the Fed’s quarterly forecasts.

The 10 year note trading at its level prior to the May flawed employment data, need some favorable remarks from Powell this afternoon to see the 10 decline more.

Source: TBWS

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