17 May Floating still carries risk
Stocks are down and mortgage bonds are slightly higher so far this morning, as the markets digest this morning’s Consumer Price Index (CPI) report measuring consumer inflation in the month of April. The Headline number came in showing an increase of 0.4% for the month. However, since the increase is mostly due to the uptick in oil prices, a strong reading was anticipated. The more important Core reading, which strips out food and energy, showed an increase of just 0.2%. The year over year number actually fell a bit, dropping from the previous 2.2% down to 2.1%. Although this is still above the Fed’s target rate of 2.0%, it gives the Fed more time to maintain short term rates at current levels.
Minutes of the Fed’s April 26-27th Open Market Committee meeting will be released at 12:00 pm MST tomorrow. At that point we will have a better understanding of the risks of a Fed rate hike. The Fed now finds themselves in a bit of a quandary, as they attempt to balance the dichotomy of global uncertainty along with an improving US economic outlook. Although several regional Fed presidents said last week that a move to increase rates could happen in the June or July meetings, it is still unlikely at this point. Janet Yellen has made it clear that she is at the helm and is not yet ready to have rates move higher. Therefore, chances are that we will see more of the same for the time being.
Mortgage bonds remain trapped in the same sideways trading channel. Floating still carries a significant level of risk relative to the limited potential improvement.