July PCE ran a tenth hot on the headline while core came in on target — and bonds sold off anyway. The 10-year is back to 4.651% and MBS gave back part of Tuesday's rally, with UMBS 6.0 at 101.53 as of the 8:47 AM ET print.
The July PCE report landed at 8:30 AM Eastern and it was not the clean number the bond market had positioned for. Core PCE came in on target at 0.2% for the month — 0.246% before rounding, close enough to 0.3% to matter — and 3.3% year over year. Headline inflation ran a tenth above forecast on both the monthly and the annual reading and held at 3.7% annually. Nothing in the top-line set came in below expectations, and traders were set up for better news, so the reaction was immediate. As of the 8:47 AM Eastern print the 10-year Treasury was at 4.651%, roughly 3 basis points above Tuesday's 4.620% close, and MBS were lower across the coupon stack: UMBS 6.0 at 101.53, down about 3 ticks, and UMBS 5.5 at 99.54, down about 4. By 9:13 the 5.5 had slipped further to 99.48, about 6 ticks below Tuesday's close.
Tuesday's rally was real, but it rested on one thing: oil fell hard on peace-process headlines and yields tracked it down all day, closing at 4.620% — right on the floor that has capped the move lower since late July. This morning is the first test of that floor since it was reached, and so far it has held rather than broken. Durable goods and second-quarter GDP were released alongside PCE, and there is a 5-year Treasury note auction at 1:00 PM Eastern. A hotter headline does not close the door on a September rate cut by itself, but it narrows the path. Jobless claims come Thursday, the August jobs report on September 4 and CPI on September 11 — all of it before the FOMC meeting on September 16.
For borrowers, the practical read is this. Tuesday's daily average finished near 6.74%, its best level in nearly a week, and this morning is pointing the other way. If the bond weakness holds through the session, lenders will reprice for the worse and that number will not survive the afternoon. If you are floating with a lock expiring soon, this is a morning to make the call rather than let it ride. If you locked earlier this week, you locked into the better half of the past month. And if you are waiting for the 30-year to break well below where it sits now, today's data is worth taking seriously about what that would require: a genuinely different inflation picture, not a better week of headlines.
— David Burson, NetRate Mortgage