Risks favor: Carefully Floating

Current Price of FNMA 5.5% Bond: $100.50, +19bp

Back in the zone! The Fed’s most favored measure of inflation arrived this morning – and the Core Personal Consumption Expenditure Index (PCE) for February was reported at 0.1%, matching expectations. But more importantly, and thanks to a downward revision to the prior month’s reading, the important year-over-year Core PCE rate now stands at 2.0%, and within the Fed’s desired target zone of 1 – 2% for core inflation. The year-over-year Core rate had crept up to 2.2% in recent months, so seeing this moderation in core consumer inflation is very good news.

The overall PCE, which includes volatile food and energy costs, was also reported at 0.1% and matched expectations. This left the year-over-year headline PCE at 3.4%. Bonds had opened the day lower, but have since improved on the favorable core reading, and are now attempting to hold their ground back above the 50-day MA.

In other economic headlines, Personal Income rose 0.5%, which was better than an expected increase of 0.3%, and Personal Spending matched expectations of 0.1%. Consumer Confidence for March was reported at 69.5, which was near expectations of 70.0. None of these headlines moved the market very much this morning, and Bonds are continuing to move higher on the favorable inflation news found in the PCE.

Mortgage Bonds are now back above the 50-day Moving Average, and if prices are able to hold their ground, we could see them trade a bit higher still. But if they are forced back under the 50-day MA, the next floor of support is another 40bp below, at the 100-day MA.