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Inflation at the manufacturing level today dropped -0.5% from last month to a very mild +1.3% year over year increase. Stripping out food and energy, which have cooled recently, the Core PPI is still only +2.4% from a year ago.  Lower PPI numbers lead to lower CPI numbers in the future.

The other big report out today is Retail Sales, which show consumer appetites waning.  The official number shows we’re spending -0.1% compared to last month. Both of these data points are disinflationary and a boon to those of us who are pulling for lower interest rates.

The Fed meets again in 28 days and there’s a 99.8% probability that they leave rates unchanged. We also see a 97.8% likelihood of another pause at the January meeting, and currently there’s a 25% chance that the Fed lowers interest rates by 1/4% at the March 20th meeting. Looking down the road, is does not appear that rates should be moving higher any time soon.

Having all that info on the continued receding of inflation’s grasp, it’s mildly curious that MBS are down 25bps this morning. However, after yesterday’s 69bps gain at the closing bell, a mild pullback should be viewed as a healthy market short term correction.

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