MBS Live Day Ahead: Not Expecting Fireworks Ahead of 3-Day Weekend

Between the mid-term elections earlier this week and the simple tradeflow move following the Fed yesterday, bond markets have had their chance to make any necessary adjustments before the next big data point coming up next week.  CPI (the consumer price index) isn't the be all, end all market mover, but it's important right now because it has a chance to confirm or reject the notion that the strongest wage growth in a decade will actually translate to an uptick in prices.

If we're to believe this morning's Producer Price data, consumers should certainly be prepared to pay more.  If CPI continues in a 2.2-2.3% year over year range (at the core level), that would actually be a bond-friendly development.  It would mean producers aren't able to pass on their higher input costs and that consumers aren't willing/able to pay them.  The implied sluggishness in inflation could easily help bonds hold onto the ceiling at which they're currently consolidating.

I'm not expecting any major break or bounce with respect to this ceiling until after next week's CPI (Wednesday) at the earliest.  Or perhaps the safer thing to say from a prediction standpoint is that it would be far less surprising to see yields continue hovering in this 3.18-3.25 range than it would be to see a breakout of that range.