Stocks are higher and Mortgage Bonds are trading near unchanged levels so far this morning, which is a bit of a disappointment after what should have been a Bond-friendly Consumer Price Index (CPI) report. Unfortunately, there are a lot of other factors, mainly surrounding tariffs, that are impacting the markets as well.
Later this afternoon at 1:00 p.m. ET there will be a 10-year Treasury Note Auction, which could impact the markets, depending on how much demand there is to absorb the new supply. This morning’s lighter CPI report may influence them to get in now before yields come down further.
Consumer Price Index
The February Consumer Price Index (CPI) report showed that overall inflation rose 0.2% for the month, which was lower than the 0.3% expected. Year over year, inflation slowed from 3% to 2.8%, one tenth lower than anticipated.
In the previous report for January, Energy and Food prices caused inflation to move higher. In the February readings, however, they were pretty tame. Energy rose 0.2% month over month, which was a little disappointing. Gasoline fell 1%, but counteracting that was a rise of 1.4% in energy services, which includes electricity.
Food also rose 0.2%, with 2/3 of the rise coming from eggs alone. Eggs rose 10% in February and are up almost 60% year over year!
The Core rate, which strips out food and energy prices, increased by 0.2%, also one tenth lighter than market estimates. Year over year, Core CPI moved from 3.3% to 3.1%, which was better than estimates of 3.2%.
Airline fares fell a sharp 4%, due to a combination of lower fuel prices and less demand. As we went over yesterday, the airlines have reported a downturn due to less government, business, and leisure travel.
Shelter is the key: It makes up 44% of the entire Core index, and it came in favorable. Shelter rose 0.28%, which is showing signs of catching up to more real time readings. Still, on a year over year basis, it’s up 4.24%. While that’s an improvement, it’s still much, much higher than more reliable and real-time blended rent figures that are around 1.6%. Catching up shelter and removing the lag, Core CPI would be 1.95% - right in line with the Fed’s target.
Truflation also reports inflation on a more real-time basis, using millions of data points vs the roughly 80,000 used in the CPI. Truflation is showing that overall inflation is at 1.32%, with shelter being 1.41% - also confirming the overstated shelter within CPI.
Bottom line – this was a good CPI inflation report. Hopefully Bonds can gain their footing throughout the day and are helped by the 10-year Auction.
Mortgage Apps
The Mortgage Bankers Association (MBA) reported that mortgage rates fell from 6.73% to 6.67%, which helped juice mortgage activity. Rates are now between 1/8% and 1/4% lower than this time last year.
We know the demand is there as rates fall because once again, activity rose. Purchase applications rose 7% last week after rising 9% in the previous week and are now up 4% on a year-over-year basis. Refinances rose 16% after jumping 37% in the previous report and are now up 90% year over year.
Additional Labor Market Insights
The Challenger Job Cut report showed that in the first two months of the year, announced layoffs are 222,000. That is the highest two months to begin a year since 2009. Some of those (63,000) were due to DOGE cuts, but even removing that, it’s much higher than the norm. This could be a sign of further weakness to come in the labor market, with the unemployment rate moving higher.
GDP Estimates
The Atlanta Fed is projecting that Q1 GDP is going to come in at -2.4%. A big reason for the decline is the US importing much more than they are exporting. This is likely happening as companies try to import as much as they can ahead of the tariffs. Normalizing those figures gives you a GDP reading of about 1%, which is still pretty weak.
Technical Analysis
Mortgage Bonds closed beneath support at 101.39 yesterday and are now testing that level as a ceiling this morning. So far, it’s holding and preventing yields from moving higher. If Bonds start to sell off, there is some room to move lower until reaching a dual floor of support, formed by the 25 and 200-day Moving Averages.
The 10-year has moved up to 4.30%, breaking above its 200-day Moving Average. Yields climbed up to the next level of resistance at 4.33%, but that level is holding and preventing them from going higher for now.
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