Core CPI Flat in August. Door Open for Further Fed QE. Choppy Price Action Continues

Led by energy prices, CPI rose 0.3% in August. This was slightly higher than forecast but pretty much on the screws when you back away and look at the range of economist estimates.  The core number, which strips out food and energy, was UNCH in August,  the market was expecting +0.1%. Investors will focus their attention on the core number because food and energy prices are volatile on a month to month basis. 

Overall, this data won't do much to quiet the crowd calling for further Fed quantitative easing action.  We already know Bernanke wants price levels to move higher (raised his inflation target), with the core number indicative of disinflation, there is room for the Fed to indirectly lower interest rates. The main intention of this move would be to reduce the incentive to save and spark some spending and investment.  In the month ahead we will be hearing more chatter about another Fed QE program/asset purchases.

Here is a quick recap. Housing metrics are stale...

RTRS-U.S. AUG CPI +0.3 PCT (+0.2541; CONSENSUS +0.2 PCT), EXFOOD/ENERGY UNCH (+0.0465; CONS +0.1 PCT)
RTRS-U.S. AUG CPI YEAR-OVER-YEAR +1.1 PCT (CONS +1.1 PCT), EXFOOD/ENERGY +0.9 PCT (CONS +1.0 PCT)
RTRS-U.S. AUG UNADJUSTED CPI INDEX 218.312 (CONS 218.300) VS JULY 218.011
RTRS-U.S. AUG CPI ENERGY +2.3 PCT, GASOLINE +3.9 PCT, NEW VEHICLES +0.3 PCT
RTRS-U.S. AUG CPI FOOD +0.2 PCT, HOUSING UNCH, OWNERS' EQUIVALENT RENT OF PRIMARY RESIDENCE UNCH
RTRS-U.S. AUG CORE CPI SEASONALLY ADJUSTED INDEX 221.779 VS JULY 221.676
RTRS-U.S. AUG REAL WEEKLY EARNINGS ALL PRIVATE WORKERS UNCH (CONS +0.1 PCT) VS JULY +0.2 PCT (PREV +0.2 PCT)

Market Reaction..

Stock Futures: Mostly UNCH to slightly lower, but well off the overnight high print of 1132.75.  S&Ps  now +2.75 @ 1125.25.

1130 to 1135 is an area of heavy resistance...if broken, we could see S&Ps run as far as 1170 as model traders follow the buy signals sent by their black boxes.

Interest Rates: The 2s/10s curve initially firmed to 224bps but has since steepened back up to 226bps. The 10 year note touched the second layer on our Fibonacci Fan before bouncing higher. 10s are currently +9/32 at 99-03 yielding 2.728%.

FYI: Today is 48 hour notification day for GNs. You know the routine by now. If not: READ MORE

FN 4.0s ran up to 102-10 as the data flashed, this is a key pivot in our range, which is looking more and more like a downtrend, signaled by a head and shoulders topping pattern (bearish!). The November delivery FNCL 4.0 is +0-04 at 102-08. I've got the production MBS coupon marked at 3.665%. Yield spreads are wider on a nominal basis. If lenders take down indications right meow, loan pricing would be about 0.125bps better. But it is a Friday, so let's just assume 5bps to avoid disappointment.

Today is Quadruple Witching Day. That means contracts for stock index futures, stock index options, stock options and single stock futures all expire today. Volume is low and both stocks in bonds are trading near key inflection points. This implies we should expect choppy price action.

Listen to the Cars: MOVING IN STEREO

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PS. 6 MONTHS TO ST.PATRICK'S DAY!!!