Consumer Level Inflation Contained While Retail Sales Continue to Improve

By: • Wed, Apr 14 2010, 10:14 AM

Good Morning.

Loan apps fell last week. I am not so worried about refinance apps continuing to decline, this is an expected event. I am however troubled by the retracement in purchase application demand. The homebuyer tax credit expires at the end of the month. Prospective homebuyers should be applying for loans at this point. While I have long believed the extended version of the tax credit would not provide a major boost to home sales...I have always been hopeful. If purchase apps don't rebound next week, I will be sounding alarm bells.

You tell me....are you seeing a steady inflow of new purchase apps? Was last week an outlier? I think we see loan apps regain lost ground in next week's release....

The "rate sheet influential" portion of the bond market held within the confines of our 3.57 to 3.85 range yesterday. Although defensive biases were obvious and rates moved mostly sideways, the yield curve flattened and the previous session's positive progress remained intact. We continue to take rallies one day at a time....

830AM data has been released...

The Consumer Price Index, a measure of inflation, came in right on expectations at +0.1% in March. Excluding food and energy (core CPI), consumer level prices were unchanged in March. This was slightly better than estimates which called for a 0.1% gain. Headline inflation is up 2.3% on a year over year basis while core is up 1.1%.

Here is a table recapping the data. Notice Gasoline prices fell 0.8% in March. I was not expecting that...

Retail Sales data also hit screens at 830AM. In March, retail sales rose 1.6%. This was better than forecasts which called for a read of +1.2% and greatly improved from February's +0.5% print. This is the third month of improved retail sales and the 9th uptick in the past 12 months.

Below is a recap of the data. I wonder if the increase in building materials and garden equipment has anything to do with the beautiful weather many regions enjoyed in March. Remember, economics is the study of choices. If the weather is nice, people generally choose to go outside and do something productive like rake out old mulch from flower beds and replant gardens. Given the drastic drop off in disposable income, I am willing to bet more people are growing their own vegetables. Random thoughts I know...but its the study of choices.

So inflation is well-contained but consumer spending continues to improve. One is bond bullish the other is bond bearish. Looks like 830AM data was a wash....

The 10 year TSY note yield move higher overnight as global equity markets traded in the green in overseas trading. The 3.625% coupon bearing 10 year note is currently +0-02 at 98-15 yielding 3.813%.

"Rate sheet influential" MBS coupons are chopping around their recent range as well. The FN 4.5 is currently +0-02 at 100-11.Yield spreads widened all day yesterday and are modestly wider to start today's session.

REPRICES FOR THE BETTER CONSIDERED AROUND 100-15

REPRICES FOR THE WORSE AROUND 100-00

Bernanke's testimony will be made available at 10AM. From a bullish perspective, we look for 10s to test 3.78%, then 3.75%, then 3.71%. From a bearish perspective, we find our first firm layer of support at 3.85%, then 3.89%.

Bernanke tapebombs are more likely in the Q&A session. I am watching on CSPAN3