Is inflation coming or not?

___

Published Date 5/11/2018

Nice improvements yesterday; early this morning the 10-yr and MBSs started unchanged. Today is the coupon rollover from May to June, a drop of 20 bps in prices although it should not impact mortgage rates this morning.

At 8:30 am EST we took note of April import and export prices; import prices were believed to be +0.5%, as reported +0.3% and March import prices revised from 0.0% to -0.2%. Export prices were thought to be +0.3% but increased 0.6%. Yr/yr import price +3.3% from 3.6% in March; yr/yr export prices increased to 3.8% from 3.4%. No inflation in this report. In April a rebound in the cost of petroleum products was tempered by a decline in food prices. Prices for imported petroleum rebounded 1.6 percent after declining 2.2 percent in March. Excluding petroleum, import prices edged up 0.1 percent in April after being unchanged in the prior month. Import prices excluding petroleum rose 1.7 percent in the 12 months through April. The cost of goods imported from China slipped 0.1 percent in April after rising 0.2 percent in March. Prices increased 0.2 percent in the 12 months through April.

St. Louis Fed Pres. Jim Bullard is saying this morning that he doesn’t see a reason to increase rates any further; saying rates may have already increased to a neutral level that is no longer stimulating the economy. There are “reasons for caution in raising the policy rate further given current macroeconomic conditions.” Bullard has a history of being more dovish than his fellow Fed officials, and he is not a voting member at the FOMC this year. Bullard’s estimate of market-based inflation expectations shows that investors “believe there is currently little inflationary pressure in the U.S.” citing it as an equilibrium process, not an inflationary one. He believes it is not necessary to disrupt it with higher interest rates. He is swimming upstream; the Fed is still worried about inflation, even though recent reports have shown less inflationary pressures in the economy.

Inflation or not? Most continue to believe inflation will increase even when data reports like yesterday’s April CPI was softer than forecasts. It’s logical that inflation fears are high; strong employment, increasing energy prices, rising home prices, wages, although lagging so far continue to add trepidation over increasing higher earnings that generally lead to increasing prices of goods and services. Then there is the Fed that has made it clear the Federal Fund rate will be increased at least two more times this year; the first coming next month. The Fed and other major central banks have been crying wolf about inflation increasing for most of the last three years and are confident they are correct now.

At 10:00 am the mid-month University of Michigan consumer sentiment index was expected at 99.0 from 98.8 on the final April read; the index reported at 98.8.

Rate markets are holding yesterday’s improvements but so far they unable to improve. No changes in the underlying fundaments or our bearish technical bias. Until 2.90% for 10-yr is breached, our work will continue bearish or at best neutral. No major changes in rates now for the last two weeks.

Source: TBWS

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

http://nmlsconsumeraccess.org/

NMLS # 75605