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US Inflation Pulls Back In March

US INFLATION PULLS BACK IN MARCH

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More price declines yesterday in the mortgage markets and the 10 yr note rate up 4 bps. Looking at yesterday’s economic reports; personal income for March up 0.2%, less than 0.3% expected; personal spending was expected to increase 0.1%, as reported was unchanged. Janet Yellen’s favored inflation data; personal consumption expenditures down 0.2% in March, the core PCE (ex-food and energy) down 0.1% both less than expected. Yr/yr PCE +1.8%, yr/yr core PCE 1.6%, based on those numbers, inflation is still not moving to the Fed’s 2.0% target. The April ISM manufacturing index expected at 56.5 from 57.2 in March was lower at 54.8; still above 50 and expanding, but it did slow a little. March construction spending expected +0.5% declined 0.2%; yr/yr at 3.6% but in Feb. yr/yr was +5.4%. Soft data reports vs Hard data reports; soft data like the two monthly consumer surveys are glowing; the consumer confidence index at multiple year highs and the U. of Michigan sentiment index also holding at excellent levels, hard data, however, such as personal income and spending not reflecting the same optimism.

Today the April auto and truck sales are due. No other data on the schedule today.

Congress will pass a debt increase before the end of this week to keep the government open until the end of this fiscal year (Sept 30th).

President Trump is saying he would be “honored” to meet North Korea’s Kim Jong Un (under the right circumstances); in the meantime North Korea whose rocket testing has been blowing up on launch still threatening nuclear war. North Korea accused the United States on Tuesday of pushing the Korean peninsula to the brink of nuclear war after a pair of strategic U.S. bombers flew training drills with the South Korean and Japanese air forces in another show of strength. Markets don’t particularly care about the rhetoric; it is very unlikely North Korea’s bluster has any serious immediate concerns.

The FOMC begins its two-day meeting this morning with its awaited policy statement at 2:00 pm tomorrow. No increase in rates but more divining into whether the Fed is still thought to be prepared to increase the Federal Funds rate two times this year. Many economists and Wall Street analysts still believing the Fed will move two more times this year; so far, however, the bond market remains unsure. The economy is plodding along, but the idea of 4.0% GDP growth based on President Trump’s tax cuts, deregulation and fiscal spending is very unlikely this year and only a possibility next year. The Fed will likely hold to its forecasts of 2.0% growth; Q1 GDP the weakest since 2014 on the advance report last week. Every Fed official that has been speaking and talking about more tightening in the last two months have ended with the well-worn comment, that it is all data dependent. The ECB last week was expected to begin the process preparing markets for slowing its QEs and increasing its -0.4% base rate; the ECB made no attempt to send that signal, and Mario Draghi commented he still is concerned about the lack of inflation.

The bellwether 10 yr note is, and has been, holding very well at or around 2.30%/2.32%. Stocks are continuing to improve on the belief that the economic outlook will be better and companies will continue to report better than expected earnings. There is little to be concerned about on inflation, keeping the long end of the treasury yield curve from increasing, good for mortgage rates. Not much bearishness in our technicals but equally not much bullishness either; neutral now but with a very slight bias toward lower rates. Stocks will lead the way again today; the DJIA opened +39 but so far in early activity hasn’t been able to improve, and MBS prices have turned fractionally positive from the 9:30 levels, up 3 bps at 10:00 (+5 bps from 9:30). The hot sector is the NASDAQ that is making new all-time highs recently, opened +7 this morning and presently -3 points.

Source: TBWS

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