The Day Ahead: Consumer Prices and Consumer Sentiment

Thursday was an odd day for markets.  At several points in the day, bond markets reversed course and headed the other direction with less-than-insignificant amounts of determination.  Each example of that behavior was the result of a different underlying cause.  Some of those causes were logical--on the list of 'usual suspects' if you will--while others were completely unexpected.

But when we take a step back and discount some of the outlying information, be it toy grenades causing WFC #2 in Manhattan to be evacuated, or uncommonly high deviations from estimates on the morning's economic data, we're left with a session that would have been nearly as flat as Wednesdays, ending up just slightly weaker.

Interestingly enough, the "weird, flighty chopiness" of the day tells us the same thing as the boring underlying flatness: markets have no idea where they're going right now!  

November 2011-Mid-March 2012 was easy...  Bulls and bears marched on opposite sides of the wall.  The butter-side-uppers were built machines to defend 10yr yields from going higher than 2.10 while the butter-side-downers didn't want to give up 1.80.

Mid-March Through last Friday morning was easy (in retrospect anyway)...  Just go from one range trade that everyone and their brother agreed upon (1.8-2.10) to another similarly unanimous one from 2.10-2.40.  It was even the same 30bp range again, just to make things easy to remember!

But then Friday's big miss on NFP came along and screwed everything up, pushing yields right back down under several layers of yields comprising "the wall" between the two ranges (it's a thick wall... 2.14-2.07 basically).  We can empathize with the market's confusion.  Indeed, "what now?"

Just like we were all staring at each other during waiting to see who would fire the first shots during the last range bind, the same thing is playing out on a much shorter time scale this time.  Is someone or something going to take this thing back up to higher yields than 2.070?  Or is that supposed to be the ceiling now?  Find out 2 weeks from now when a bunch of inconsequential housing data leaves markets transfixed on 4/25's FOMC Announcement and Bernanke Press Conference, followed 2 days later by the first look at Q1 GDP.

Today?  Oh yeah... there's some data.  Consumer Prices are due out at 8:30am and expected to fall in terms of the headline while the CORE rises, just like Producer prices did today.  The only other scheduled econ is Consumer Sentiment at 9:55am, expected unchanged.  Beyond the data, there's scheduled Fed "Twist" buying in 2036-2042 maturities and a few instances of Fed-Speak, including Bernanke at 1pm.

If today's data takes us outside the recent range, we'll give it some more attention then (but really, with two weeks to go until the meaty stuff, what does it matter?  We could see a lot of movement between now and then rendered completely inconsequential with one minor word change in the FOMC announcement.  Some would argue that it was just one word changing ("a Few" became "a couple") that caused the most recent significant move in bond markets.