by Ben Bauer

Mortgage Bonds are modestly lower this morning after hotter than expected core consumer inflation, lower unemployment claims and mixed numbers from regional manufacturing.

The September headline Consumer Price Index (CPI) fell 0.2%, inline with estimates, but falling for the second month in a row. Lower fuel prices is the culprit. However, the more closely watched Core CPI, which strips out volatile food and energy, rose 0.2% hotter than the 0.1% expected, pushing the year-over-year Core to 1.9%, the highest reading since July 2014. Inflation numbers are on the Fed’s radar headed into the October and December FOMC meetings. Rising rents are adding to the inflation fire – but is that a reason for the Fed to raise rates? We don’t think so and we find it rather interesting that the Fed’s focus has broadened to include global market conditions.

Also putting pressure on Bond prices was a decline in Weekly Initial Jobless Claims, falling to the lowest level since 1973 to 255K, below the 269K expected and down 7K from the previous week. It is worth noting that part of this decline is attributed to Americans falling off the Unemployment Insurance rolls and exiting the workforce for one reason or another.

In the manufacturing sector, the New York Empire Index improved to -11.4 in October from September’s -14.7 reading, though below the -8.0 expected.

Stock prices are higher as the recent weak economic numbers could push a rate hike into 2016. Currently, Fed Fund Futures are pricing in a 29% chance of a hike in December, and a 50% chance in March. An October hike now appears unlikely.

Technically, the chart below is pretty revealing. The Bond must break above this black line and the yield on the 10-year Note must convincing push beneath 2.00% in order for rates to move another leg lower. Until that time – clients should be advised to lock at what looks like the top of the current market.