The weak economic data helped to support the rally in bonds. Stock futures were flat before the data but are traded near record highs on the notion of a 25bp rate cut by the Fed in September.
April Consumer Price Index(CPI) m/m rose 0.3% vs 0.4% expected and down from 0.4% in March, y/y 3.4% inline and down from 3.5%. The Core rate, which strips out food and energy, was inline at 0.3% m/m and down from 0.4%, y/y 3.6% inline and down from 3.8%. The May New York Empire Manufacturing was -15.60 vs .9.90. The closely watched Retail Sales data, or consumer spending, was flat in April versus 0.4% estimated. The May NAHB Housing Market Index falls to 45 from 51 in April and below 51 expected.
The 10-year yield has plunged to 4.37% and right above support of 4.35% with its 200-day Moving Average at 4.33%. Traders could have been betting for a hot CPI report and went short, only to have to cover after the bond-friendly headlines. Short selling is a trading strategy where investors and traders speculate on a securities decline. Short sellers bet on, and profit from, a drop in a security's price. In this case, prices rose and yields fell … not good for those shorting the market.
However, we are not out of the woods on the inflation front. This month, commodity prices have spiked. Typically, changes in commodity prices can drive inflation trends. According to the U.S. Bureau of Labor Statistics, commodities make up close to 36% of CPI. So, we will be watching this closely for the May data.
Technically, the FNMA 30-year 6% coupon has broken above resistance one (R1) at 100.50 and sets its sights on resistance two (R2) at 101.00. As mentioned, the 10-year yield is 4.38%, right above support at 4.35%, the level it bounced off on April 10th.
The good news for consumers is that rate cuts are coming next and now sooner than previously thought.
