UMBS opened the day up 9 bps.

Bonds were stronger in the overnight session with Fed follow-through buying overseas and weak manufacturing PMIs in Europe.

Philly Fed Index = 3.2 vs -2.3 f’cast,                         5.2 prev

Philly Fed Prices = 3.7 vs 16.6 prev

Jobless Claims = 210k vs 215k f’cast,                    212k prev

Continued Claims =  1807k vs 1803k prev

S&P Services PMI = 51.7 vs 52.0 f’cast,                  52.3 prev

S&P Manufacturing PMI =  52.5 vs 51.7 f’cast,      52.2 prev

In the economic projections, the Fed raised their estimate for this year’s GDP growth from 1.4% to 2%, pushed down their estimate for unemployment from 4.1% to 4% and increased their estimate for core inflation growth from 2.4% to 2.6%.

During the press conference, Jerome Powell said that the recent disappointing inflation numbers might be due to seasonality, and he also said that the Fed might begin to taper its balance sheet runoff. I think the comments on tapering QT were a surprise to the market. Theoretically this should be a positive for MBS spreads, although the Fed’s MBS portfolio is way out of the money, and the only runoff will be from people who are moving.

When asked about shelter inflation, he mentioned that rents seem to be cooling off and he was convinced that overall inflation would move lower.

Overall, the stock market liked the decision and the bond market seemed to take comfort in the fact that quantitative tightening might decrease going forward.

The Fed Funds futures didn’t make any dramatic changes, although the June chances of a rate cut increased from about 60% to 75%, while the December futures remained at three cuts. The December futures are handicapping a bigger chance of 100 basis points than 50 this year.

Despite many households locking in low mortgage rates, household interest expenses are skyrocketing. In 20Q4, the peak of the dotcom boom, interest expenses/GDP hit an all-time high of 2.2%. In 07Q2, shortly before the onset of the Housing Bust, interest expenses/GDP cyclically peaked at 2.04%. As recently as 22Q1 they were 1.1%, their lowest since 59Q4. However, in 23Q4, interest expenses/GDP were a shocking 2.02% and rising rapidly! Deeply concerning.

Looking solely at the end of day trading levels in the bond market, we could conclude that we are once again deprived of any meaningful motivations for momentum.  That’s partially true in the sense that today’s events were not “top tier.”  Nonetheless, we can still make a case for some relevance.

After all, bonds were definitely stronger ahead of this morning’s data.  The initial weakness could be coincidental, but the 9:45am reaction to the PMI data was fairly clear in terms of volume and volatility.  That’s interesting considering it was mostly in line with forecasts.  Some analysts suggested the focus was on the “confidence” metric at a 22 month high in the services sector and that’s a fair take if we’re trying to justify the reaction.  In the bigger picture, we’re waiting on next Friday’s PCE data (more like waiting on Monday since the bond market is closed next Friday).

UMBS closed the day pretty much flat – up 2 bps.

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