MBS MID-DAY: Low Gas Prices Now Like QE. Here's How That's Helping Us

Be warned that the following reduces a complex, multifaceted issue to one of its individual components.  It's merely an examination of this one component (and a superficial one at that) and it's effect on today's trading.

Oil has been a big deal since it began tanking in late 2014.  As rates began to rise in 2015, analysts began suggesting that a rise in oil was partly to blame.  Of course, the only way that truly makes sense is to assume oil is rising WITH rates for OTHER reasons as opposed to assuming a rise in oil prices is actually pushing rates higher.

Why "of course?"  Let's take a look at what happens when prices rise again.  Today's Consumer Sentiment numbers tell the story.  88.6 vs 96.0 forecast and a marked increase in inflation expectations.  Here's a chart of consumer sentiment and gas prices (inverted so that higher = lower prices).  It doesn't really matter which is which (incidentally, sentiment is in orange).

The takeaway is that fuel prices had an outsized impact on sentiment heading into 2015.  In fact, sentiment never broke 2013's highs until the big drop in fuel prices began.  Now that consumers have had a taste of those prices, they'll be increasingly sensitive to adjustments in the other direction, just like markets are sensitive to the Fed pulling away one of their various punch bowls.   It just so happens the consumer punch bowl is filled with gas.

While Consumer Sentiment isn't the market's favorite gauge of growth, a pessimistic consumer certainly counts for something AND during a time where much of the economic data (apart from job counts) is lackluster.  This doesn't bode well for the Fed being able to cite a growing economy as a reason for a rate hike.

All that to say: bonds are rallying nicely today, and surprisingly enough, the rally kicked into high gear after Consumer Sentiment data.  Granted the trading levels coincided with some technical levels that triggered modest snowball buying, but those levels may never have been hit without the sentiment data.