The Producer Price index for April read at a + 2.0% level. Expectations were of 4%. This is good news for rates. However, the core rate which excludes volatile food and energy prices rose at 4% versus expectations of 2%. This is bad news for rates. Nonetheless fixed income is slightly improved on the day with both treasuries and MBS trading between 5 and 10/32nds higher.
Coupled with yesterday's strong finish, this will leave us with some great rates for the day. MBS response to the much higher than expected Core Inflation read is somewhat counterintuitive. Traders seem to have reacted more to the headline rate than the core rate. It's usually the opposite. Why the change?
My view is that traders see the storm coming. We were all ducking down in our foxholes waiting for the "crash" to be over. Slowly but surely, some of the braver bulls ventured out into the open, driving stocks back up to 13,000 on the Dow. We looked around and wondered: "was that it?" Analysts yesterday were calling a "turn" to the recession. But just like every action movie, someone had to mention the line: "it's quiet, almost too quiet..."
It seems that those who ventured out into the open are second guessing themselves due to other economic considerations. For instance, The Chicago Fed's National Activity Index hit a 7 year low this morning, bringing the moving average to its lowest since 2001 (amazing! that was the last recession we had!).
In addition, this continues to be a historically poor earnings season. Whatever the case, given the events of the last 6 months, it must seem premature and even a bit "too good to be true" to call an end to the slump. So some think we might have a slight "check-up" in stocks this week. That could be good for MBS.
The 5.5% coupon is currently at 100-25, 5/32nds higher than yesterday. So, indeed, look for good rates this morning. But as was the warning yesterday, be very careful if floating. Every time we've knocked on the door of 101-00 in the last few months, we've been abruptly thwarted. All the brave bulls need to run up equities is some reassurance they won't be struck by lightning while lingering out in the open, and stocks will rise (and so will mortgage rates). Stay tuned.