Market Awaits Thursday’s CPI Report

  • Treasury yields are taking back the increases from yesterday as optimism builds that tomorrow’s CPI will prove to be a positive as both stocks and bonds are rallying this morning. The rally in bonds may have its limits, however, as the Treasury will be selling $32 billion in a reopening of the current 10yr note. Presently, the 2yr is yielding 4.26%, unchanged on the day while the 10yr is yielding 3.58% up 11/32nds in price.

 

  • With no economic releases today, nor scheduled Fed speakers, the market will focus on tomorrow’s December CPI Report. Expectations remain for a market-friendly report with a decrease of -0.1% in overall CPI for the month, with the YoY expected to dip from 7.1% to 6.5% as large gains from last year roll off the calculation. Core CPI is expected to increase 0.3% for the month, above November’s 0.2%, but the YoY is forecast to fall from 6.0% to 5.7%.

 

  • The market is priced for a friendly inflation report so if we get it don’t expect too much of a rally off the numbers. Should the report surprise with a hotter-than-expected read, some selling should ensue, especially on the short-end where the market is pricing in rate cuts for later this year, much to the chagrin of most Fed members.

 

  • Speaking of the disconnect between market expectations for the Fed and the Fed’s own forecasts and rhetoric of no rate cuts in 2023, prominent fixed income investor Jeffrey Gundlach weighed in yesterday and said investors should pay more attention to the market’s outlook versus the Fed. In recent years it does seem the market has led the Fed when it comes to calling future fed funds moves, and Gundlach thinks the market will have it right again this year.

 

  • One thing the Fed, and Powell particularly, have tried to do is shift the narrative from not just focusing on inflation but with the increase in wages in 2022, which they fear will keep inflation stickier than one might expect, especially core services (ex-shelter expenses), which they have started to highlight in recent discussions.

 

  • They will get another crack at it tomorrow with Harper, Bullard, and Barkin scheduled to speak Thursday after the 8:30am ET CPI release. I suspect we’ll hear their thoughts on the report and specifically about that core services result. The Fed remains resistant to saying anything good about the recent inflation trend while wage gains remain strong, even after the friendlier wage numbers in the December employment report, so it will be interesting to see how the latest inflation report is spun.


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.06 4.85 4.80 4.81 4.95 5.41
0.50 5.05 4.82 4.74 4.70 4.81 5.30
1.00 5.04 4.79 4.71 4.66 4.72 5.17
2.00 4.77 4.65 4.58 4.60 NA
3.00 4.53 4.54 NA
4.00 4.49 NA
5.00 4.46 NA
10.00 NA

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Published: 01/11/23 Author: Thomas R. Fitzgerald