Does Today’s Inflation Data Change Anything?

Bonds initially sold off following the higher-than-expected core CPI reading this morning.  Shelter inflation spiked back to troubling territory as well–something that was perhaps an even bigger problem for bonds.  Nonetheless, bonds moved back to stronger territory in short order.  The only lingering damage was to the Fed’s rate cut outlook for next week.  Markets were already squarely in the 25bp camp, but today’s data went a long way toward sealing the deal.  When it comes to the longer term rate outlook, today means nothing.  The Fed and financial markets would be hypocritical if they allowed one inflation report to materially alter the outlook.

Market Movement Recap

09:39 AM Slightly stronger overnight then modestly weaker after CPI.  MBS down 3 ticks (.09) and 10yr up 1.9bps at 3.665

10:41 AM Back into stronger territory now with MBS up 2 ticks (.06) and 10yr down 2.4bps at 3.622

01:03 PM bonds were weaker into the 10yr auction and remain just barely weaker despite stronger results.  10yr up 1bp at 3.655 and MBS down 3 ticks (.09).

03:26 PM Back to ‘unchanged’ now with MBS actually up 1 tick (.03) and 10yr up only 0.3bs at 3.649