MBS RECAP: Bonds Rally on Data’s Truth. Fed’s Spin Mostly Ignored

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In a weird way, today’s Fed announcement came out right at 8:30am when Core CPI dropped to 1.7%, falling well short of the 1.9% median forecast (year-over-year).  While the Fed prefers PCE as an inflation metric, the two tend to hang out pretty close to each other.  

In either case, the Fed would like to see year-over-year core inflation at 2.0% or more before it can truly justify an aggressive removal of accommodation.  Add to the tame inflation data a negative reading on Retail Sales and an investor could be forgiven for wondering if the Fed would have to address the potentially disconcerting turn in the econ data recently.

The Fed’s approach was to acknowledge the inflation data, but to hike anyway.  It probably would have caused more drama to keep rates unchanged considering the nearly universal expectation for a rate hike among investors.  It was a gimme, in other words.  

And when you’re hiking rates, it doesn’t make much sense to take a lot of time talking about why you shouldn’t be hiking rates.  So they didn’t.  Instead, they said things should get better.  It was an uncomfortable juxtaposition of econ data and monetary policy, to say the least. 

Markets didn’t do too much to take the Fed at their word.  After all, their words didn’t make much sense in light of this morning’s data.  It’s not that 2 isolated reports are game-changers here, but they certainly add to a growing narrative of slightly weaker data and persistently intractable inflation.  

Rates rose slightly following the Fed Announcement, likely because they unveiled their reinvestment exit plan and because they didn’t dial back their rate hike outlook at all compared to the December forecasts.  But the weakness was limited, and bonds ended up closing at the best levels of the year in spite of the Fed squeezing as much hawkishness as possible into today’s events.  Draw your own conclusion about the results versus the inputs, but at the very least, this is among the strongest possible results for today’s calendar events.

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