The Day Ahead: CPI, Consumer Sentiment, Class B Roll

The Treasury market is mixed this morning as broader sentiment picked up following stronger-than-anticipated Euro area GDP results.

The two-year Treasury yield is one basis point higher at 0.56% while the 10-year holds steady at 3.22%. Gilt 10-years are up two basis points at 3.40% and comparable Bund yields are up a single point to 3.12%. Japan 10-year yield fell one basis point to 1.11%.

The June delivery FNCL 4.5 MBS coupon is +2/32 at 103-01 while the FNCL 4.0 is -2/32 at 99-27.

Euro GDP report rose 0.8% in the quarter, with Germany and France posting 1.5% and 1% gains.

"Germany led the way, expanding 1.5% in the quarter - that's 6.1% annualized. WOW!" wrote analysts at BMO Capital Markets, who noted Germany's annual GDP advanced to 5.2%, the fastest pace since reunification.

U.S. equity futures are seeing modest gains with the S&P 500 up 1.7 points to 1,349 and Dow futures 16 points higher at 12,688. 

Light crude prices rose 0.75% overnight to $99.73, while gold prices fell 0.15% to $1,506.80.

Key Events Today:

8:30 - The Consumer Price Index should report similar trends to the Producer Price Index, but more people watch this one because it reflects how rising costs are being passed onto the average spender. Total inflation is set to jump 0.4% in April following a 0.5% uptick in March, but if energy and food costs are stripped out than the gain should be a less-than-alarming 0.1%, economists predict. Even if the monthly headline figure comes in higher than expected, the market will likely be comforted by last week's collapse in energy costs.

"On the core side, we continue to see very low risk of passthrough, particularly now that energy prices have rapidly reversed course," said economists at Janney Capital Markets. "Shelter costs remain the biggest single anchor to the CPI, comprising nearly a third of the total index, and with home prices still on an evident down trend and rental vacancies elevated in many markets, we see limited risk of reversal. For the intermediate term, the normalization of consumer demand in a post-recessionary environment should allow inflation rates to stabilize in the 1.5% - 2.0% range, even accounting for $100 oil."

9:55 - A strong payrolls report and the death of Osama bin Laden aren't enough to change the spirits of the American consumer, economists say. The U of Michigan Consumer Sentiment report is expected to move forth just 0.2 points to 70 in May, as climbing fuel prices continue to hurt discretionary spending. 

"If the recent large decline in crude oil prices persists, it should remove a major roadblock to consumer confidence in the months ahead," said economists at Citigroup.

"Recent news has been a mixed bag," added analysts at IHS Global Insight. "April's payrolls and average hourly earnings improved, but there was an uptick in the unemployment rate to 9.0%. The first week in May was eventful with a volatile stock market and falling world oil prices on the economic front, and the killing of Osama Bin Laden. Stock market volatility is not a good thing for consumer mood and household net worth - especially with falling real estate prices. However, falling world oil prices can have a positive impact on consumer sentiment as long as it translates into cheaper prices at the pump."

Today is Class B Notification Day. That means 15yr MBS coupons will begin the monthly settlement process. READ MORE