• Treasuries are somewhat surprisingly finding an early bid this morning while awaiting the August inflation numbers tomorrow. That will be the key event of the week and provide the final piece of data for the Fed before hiking rates next week.


  • The debate around 50bps or 75bps continues, although the latter seems to be the preferred choice given recent Fed speak. It would take an extraordinarily weak core inflation number to flip that consensus and with Owners Equivalent Rent being such a large component of the core number, and still showing little signs of weakening, it’s unlikely that a negative print will be coming, but we’ll wait and watch.


  • The latest expectations for August CPI have the overall down -0.1% vs. 0.0% in July.  The drop in the overall will be mostly driven by continued declines in energy prices. The YoY is expected to fall from 8.5% to 8.0%. The core rate  (ex-food and energy) is expected to increase +0.3% matching July with the YoY rate moving up two- tenths to 6.1%. We’ll have a couple more months where modest 2021 increases roll off which will keep the YoY number sticky until we get to November and December when larger monthly prints from 2021 start to fall out of the calculation. That “stickiness will aid the Fed’s cause to get to a terminal rate as soon as possible, so the hawkish rhetoric is likely to continue.


  • Treasury coupon auctions today should limit the size of any rallies and might pressure prices as the auctions get closer. 3yr and 10yr notes will be auctioned today in a reopening of both issues.


  • While the August CPI report tomorrow will steal all the headlines, some other major August reports will be released this week. August PPI will follow CPI on Wednesday with another softish report expected much like CPI expectations. That will be followed by August retail sales on Thursday with sales expected flat just like in July. Ex-auto and gas sales are expected to be up 0.7%, also same as in July. So, a fairly steady-as-she-goes read on retail sales is expected. Import prices are also due on Thursday with another round of declining prices expected due to the rally in the dollar.


  • Finally, the latest read on consumer confidence is due on Friday with the University of Michigan Sentiment Survey for September. Sentiment, current conditions, and expectations are all expected to edge up vs. the August report. Meanwhile, inflation expectations are expected to edge lower in the 1yr timeframe from 4.8% to 4.6% while the longer term 5-10yr time frame is expected to remain at 2.9%. Inflation expectations are a big deal to the Fed as they firmly believe those expectations tend to be self-fulfilling, so keeping those expectations in line and not drifting higher is one big reason for the consistent hawkish rhetoric we’ve been hearing from Fed officials.


Univ. of Michigan Sentiment Survey: 1yr Inflation Expectations


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.57 3.66 3.66 3.71 3.83 4.29
0.50 3.55 3.63 3.60 3.60 3.68 4.18
1.00 3.55 3.60 3.57 3.55 3.60 4.05
2.00 3.59 3.51 3.48 3.48 NA
3.00 3.43 3.42 NA
4.00 3.37 NA
5.00 3.34 NA
10.00 NA

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Published: 09/12/22 Author: Thomas R. Fitzgerald