15 Sep We will maintain our locking bias
This morning was filled with economic news, giving investors reasons to take on new positions. To begin with, the Producer Price Index (PPI), which measures inflation on the wholesale level, came in flat for the month and also flat for the year. More importantly, after stripping out food and energy prices, the Core Rate was up 0.1% on a monthly basis and 1% on a year over year basis. Although this is still a very soft number, it’s important to note that the year over year reading was only 0.7% in last month’s report, representing a jump of 0.3%.
Retail Sales were also weak for the month of August, with the Headline number down 0.3%. Since the market was expecting a number close to 0.0%, the actual was far below initial estimates. The control group, which is factored into GDP, was down 0.1%. The Core Rate was also flat for the month, with a year over year rate of only 3.3%. This was the slowest growth rate we have seen in 4-months and a number far lower than the Fed was hoping to see.
Mortgage bonds are now trapped in a wide channel, trapped between the 25 & 50 day moving averages overhead and the 100 day moving average proving a floor. With significant room for bonds to move in either direction, there is no clear path as to which way bonds will move. With that in mind, the safe play will be to maintain a locking bias.