UMBS opened down 11 bps. S&P futures down 17.75

US investors are cautious despite strong gains last week, waiting on upcoming economic data that will influence the Federal Reserve’s decision on interest rates. This wait-and-see approach is fueled by concerns about high stock valuations after the recent rally, and the desire for clues on the Fed’s future monetary policy path.

The upcoming week will have a lot of important data, especially new home sales, house prices, and Personal Incomes / Outlays on Friday. The Personal Incomes / Outlays report contains the PCE Price Index, which is the Fed’s preferred measure of inflation. We will have to wait until next week to see how the bond market reacts since Friday is a market holiday. The most important data point occurs on the last day of the month (and quarter) and markets cannot react.

Former Fed Chairman Richard Clarida said that the Fed should be paying attention to sticky price inflation and might not be able to cut rates three times this year. I do hope that the Fed really moves into data-dependent mode, because there can be a very good case if inflation is sticky and stubborn that they shouldn’t deliver three cuts this year….If the Fed were targeting CPI right now, we wouldn’t even be discussing rate cuts.

Ultimately shelter is driving the higher inflation numbers and the only way to to get shelter down is to see more homebuilding. Unfortunately for the Fed, homebuilding booms usually happen during easing cycles, not tightening ones.

The week got off to a weaker start with most of the losses seen during the overnight session, but gradual ongoing selling during domestic hours.  There were no overt market movers behind the weakness unless we want to give credit to anxiety over the Treasury auction cycle or technical resistance.  Even if auctions aren’t the source of the outright weakness, they do likely have a hand in helping MBS outperform today.  5.5 UMBS were only down about an eighth of a point while Treasuries with comparable durations had lost roughly twice as much ground (implication being that MBS don’t have to worry about 3 big supply gluts to start the week).

UMBS ended the day down 2 bps at 100.97