The Day Ahead: Potentially Relevant CPI; Will NAHB Show Rate Fatigue?

With Bernanke's congressional testimony still a day away, Tuesday's session offers an opportunity to either make something of yesterday's ostensible positivity or to stay safe and defensive ahead of more important events.  Just as that positivity came courtesy of weaker-than-expected Retail Sales, so too would we need friendly data if we're going to get anything other than the sideways-to-slightly-lower grind in 10yr yields that has heretofore allowed for moderate MBS outperformance. 

More simply put, yesterday was either going to be a session where 10yr yields broke back above their most prominent ceiling of late June and early July near 2.62 (seen in the chart below) or something much less dramatic. Weaker data resulted in the drama-free version (and MBS did better than 10's as tends to be the case when 10's are 'drama-free'). The implication is that we're in the middle of an excessively moderate consolidation after the NFP blow-out broke the ceiling on July 5th.

Today's data line-up certainly isn't on par with Retail Sales in terms of market movement potential, but at least two of them are more on the radar than they have been for the past 2 years.   The case for Consumer Prices being more relevant is straightforward given that even Bernanke mentioned the Fed's intention to defend the inflation target from above and below.  Whether or not the Fed is thinking about such things in terms of asset purchases remains to be seen. 

Less straightforward is the significance of NAHB's Housing Market Index.  Even if it's not a mainstream Fed belief, we know the concept of a "frothy" housing market has been discussed.  Bernanke's stance on mortgage rates in the post-announcement press conference (when he said higher rates are good without missing a beat) suggests a certain bold willingness to "see how the market does" when faced with higher rates, with any cooling in Housing being a welcome side-effect of the taper talk.  NAHB's index is obviously leading New Home Sales metrics, so it would provide a good first glimpse of said cooling if it manages to come in lower than the 52.0 consensus.  The last print of the index fell just days before the FOMC Announcement.