CPI Delivers on Volatility Promise And on Paradoxical Potential

Reliably predicting the future in terms of directional market movement is tricky if not wholly impossible, but predicting higher odds of volatility is a different story.  When it comes to a report like the Consumer Price Index in the middle of 2022, we can be reasonably sure we'll see some bigger movement, for better or worse.  Today's installment delivered, but not in a completely logical way.

To be fair, the first move was entirely logical with bonds rallying sharply due to inflation coming in much lower than forecast across the board.  But since then, the paradox has been kicking in--and much more quickly than we laid out in yesterday's commentary.  Revisit it here if you like, but the short version is that low inflation can't do as much as weak economic data to spur a sustainable rate rally.  The closing line of yesterday's commentary surmised that a weak CPI reading would cause an initial rally, but one that might begin to fade after a few days.  Instead the rally in the long end of the yield curve began to fade after only a few hours!  10yr yields are close enough to 'unchanged' on the day.

2yr yields are logically doing better because they're more receptive to changes in the Fed's rate hike outlook.  But even when we look at rate hike odds, the market is much less flighty in response to inflation data than it was in June and--to a lesser extent--July.

MBS are thankfully short enough in terms of duration to be outperforming 10yr Treasuries so far this morning.  UMBS 4.0 coupons initially surged by more than half a point and, although they've also given up some gains, they're still up more than a quarter point on the day.