Good Monday AM,

MBS prices are pulling back this morning. It is not a big surprise and I do not expect this pullback to be as severe because we have three levels of support (the 25, 50 and 100 moving averages, with the 50-day being the most important).  This is often not the case. This movement and this week is about the FED meeting on Wednesday. Traders are a little more bearish going into the Fed meetings as you never know what will be said.  Add to this that tomorrow is a huge news day with Retail Sales and PPI and it all makes better sense.  I expect rates to recover after any loss we feel this week and continue to believe we will see lower rates in the coming months. Just remember price is never linear. We often take two steps forward and one backwards on the way up.

This stat still has me alarmed… The strong labor market associated with the economic recovery has prompted many people to look for higher pay, more work-life balance or a better fit with their interests, writes Lauren Weber. The share of workers leaving their jobs was 2.7% in April, according to the Labor Department, the highest such rate since at least to 2000.

Here is a great take from Bloomberg on inflation I thought I would share…

Good morning and Happy FOMC week. This Wednesday we get the next FOMC decision, and so of course, one of the top things on everyone’s mind is inflation. Actually there are two things on everyone’s mind: inflation and the Treasury market. Despite the fact that by some measures, inflation is at its highest level in several years, the 10-year yield has been declining substantially.

After a powerful move higher in March, the 10-year is now back to February levels.

As always it’s helpful to ask the question: Why are we so obsessed with inflation? What are we really talking about here?

Well in theory, it would be useful to know whether there’s something going on in the economy that merits a policy response. Is the price of everything going up? Is something broken in the functioning of everyday economic life? Should the Fed try to raise interest rates to tap the brakes on investment and consumption? Should Congress dial back stimulus? So obviously to answer these questions you have to drill down further, to see what’s driving the big upward move in CPI.

This chart from my colleague Matt Boesler, looking at last week’s CPI release gives a big clue. It shows core CPI (white line) vs. core CPI ex-transportation. You can see there’s a huge difference. If you exclude transportation-related costs, inflation measures look a lot more normal.

Now of course transportation costs are real and hit people’s pocketbooks. So the point isn’t to deny the existence of rising prices. But we can go back to the questions above and ask whether this is something that broad macro policy measures can address. We know a lot about the mess in the car industry for example. We’ve been discussing all year the chip shortage, the interplay between the rental car market (which collapsed a year ago) and the used car market, and all of that. And it’s hard to come up with a theory for how rate hikes or spending cuts or tax hikes is a productive way to deal with any of that.

Furthermore, we already see signs that the normal functioning market is doing its thing when it comes to addressing inflation. As Jon Turek wrote in a note last week: “One of the interesting things we are seeing within the U.S. economy is that there is some level of self-correction within the reopening madness. Fixed income has taken note of it. The place this example has been most obvious is in housing.”

And it’s not just housing. In a note out this morning from Ben Breitholtz at Arbor Research he notes there’s been a big dropoff in perceived buying conditions for all kinds of durables, per the latest University of Michigan survey.

So although headline inflation is very high, there are basically two things to keep in mind: One is that price increases are still largely being driven by a handful of specific categories. And two, we already see evidence that the market “works” in these categories, with consumers balking at the price surge, which will likely have a mellowing effect. Not only is there no obvious reason to adjust macro policy in the face of this data, it’s also hard to point to any existing policies as driving it. Did the enhanced Unemployment Insurance cause the chip shortage which has driven the used car shortage? Highly unlikely. Is the Fed’s new “wait and see” approach on inflation to blame for transport-specific price gains? Again, probably not. Hence you can start to understand why the Fed and traders all seem to be looking through it for now.

Please remain safe and healthy, make today great.