Heading into the day, we knew we were looking at 2 key market movers in the form of the CPI data and the afternoon’s Fed festivities (which include an announcement, economic projections, and a Yellen press conference).
The morning’s inflation data got the party started with Core annual CPI coming in at 1.7 again. This was notable it had just ticked up to 1.8 for the first time in 6 months when it was last reported a month ago. The move up to 1.8 looked like the start of a bounce back toward 2%. Today’s regression reminds markets of inflation’s intractability.
Bonds looked ready for the inflation data to tell a different story as rates were pushing against their recent ceiling. The weaker data led to an immediate surge back into the safety of the prevailing range. From there, we waited for the Fed.
As expected, the announcement itself was unimportant. The rate hike has long since been baked into bond markets and it was the forecasts that got the attention at 2pm. While the average Fed forecast was very slightly higher (for the Fed Funds Rate), the median Fed member didn’t change for the 2018 or 2019 time frames. There was noticeably less “migration” (movement of dots toward higher rates) on the Fed’s dot plot compared to September.
The dots were good for another rally in bonds. It wasn’t as big as the CPI-driven rally, but it had friends–namely, Janet Yellen. Yellen took her farewell opportunity to “let loose” (as much as she can, anyway) on a few topics that she might have phrased differently earlier in her tenure. Specifically, she noted that stock valuations were “high” even though she didn’t say that was a problem. She also pointed out that her colleagues had considered the probable impact of the tax bill in drafting their forecasts. That’s a bigger deal than it might seem because it means the fairly tepid Fed rate hike forecasts were potentially more aggressive than they otherwise would be in the absence of the tax bill.
10yr yields ended the day down more than 5bps and Fannie 3.5 MBS rose nearly 3/8ths of a point . Most of the gains came after the Fed, but at least half of the movement was attributable to CPI (the initial movement merely helped us get back into positive territory after morning weakness).
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
102-26 : +0-11
2.3475 : -0.0555
|Pricing as of 12/13/17 5:58PMEST|
Today’s Reprice Alerts and Updates
2:09PM : Fed Announcement/Forecasts Well-Received at First Glance
10:29AM : ALERT ISSUED: Moderate Early Negative Reprice Risk For Some Lenders
8:34AM : In Case You Doubted CPI’s Market Moving Street Cred…
MBS Live Chat Highlights
Hugh W. Page : “Cash out refis to buy bitcoin. What could possibly go wrong.”
Matthew Graham : “RTRS – FED’S YELLEN SAYS SHE IS PERSONALLY CONCERNED WITH U.S. DEBT SITUATION”
Edgar : “Rate hike and senate/house deal on taxes and we’re rallying…..never a dull moment in bonds.”
Matthew Graham : “She’s going out swinging”
Matthew Graham : “FED’S YELLEN SAYS STOCK VALUATIONS ARE AT HIGH END OF HISTORICAL LEVELS”
Matthew Graham : “FED’S YELLEN SAYS FED POLICYMAKERS SEE TAX PACKAGE AS MOSTLY BOOSTING AGGREGATE DEMAND BUT HAVING POTENTIAL OF BOOSTING AGGREGATE SUPPLY”
Matthew Graham : “RTRS – FED’S YELLEN SAYS FED DID DISCUSS TAX POLICY; MOST COLLEAGUES FACTORED IN FISCAL STIMULUS INTO THEIR OUTLOOK ALONG LINES OF WHAT CONGRESS IS CONSIDERING”
Matthew Graham : “yes”
Hugh W. Page : “MG was the increase in the level at which they reinvest TSY’s and MBS already in their past announcement of QT? Couldn’t remember.”
Hugh W. Page : “dot plots are out”
Scott Valins : “dot plots during presser?”
Matthew Graham : “- FED VOTE IN FAVOR OF POLICY 7 TO 2, EVANS AND KASHKARI DISSENTED BECAUSE THEY PREFERRED TO KEEP RATES UNCHANGED”
Matthew Graham : “- FED REPEATS INFLATION HAS DECLINED THIS YEAR BUT IT STILL EXPECTS INFLATION TO REACH 2 PCT GOAL OVER MEDIUM TERM”
Matthew Graham : “MEDIAN FORECAST OF FED POLICYMAKERS IS FOR THREE RATE HIKES IN 2018”
Matthew Graham : “- MEDIAN VIEW OF APPROPRIATE FEDERAL FUNDS RATE AT END-2018 2.125 (PREV 2.125 PCT): END-2019 2.688 (PREV 2.688 PCT) END-2020 3.063 (PREV 2.875) LONGER-RUN 2.750 PCT (PREV 2.750 PCT) – FED PROJECTIONS”