Friday – June 14, 2024

UMBS are pretty much flat, as the Fed Week comes to a close.

S&P futures are down 28 pts.  So I guess the money has to go somewhere. Investors sought haven assets amid deepening political turmoil in France, pushing European stocks toward their worst week in months and weakening US equity futures. The Stoxx 600 fell 0.9%, extending losses since Monday to 2.3%, while France’s CAC 40 erased its yearly gains. The S&P 500 and Nasdaq 100 are set to open lower after hitting record highs all week. The dollar strengthened

Bonds backtracked on a majority of the overnight gains in the past half hour.  Neither move was especially big and trading levels remain in positive territory ahead of lender rate sheet print times.  As such, this isn’t too alarming, but it was a bit counterintuitive given the lower inflation implications associated with the import/export price data.

The simplest conclusion is that that data isn’t the driver.  A quick look at the clock and volume suggests traders were lined up for the 8:20am CME open to square up some long positions heading into the weekend.  There’s also some chance that  Fed’s Mester’s comments had an impact, but on balance, they seemed more bullish than bearish for bonds.   She basically said that their actions are doing something, inflation is moving down, but need a couple more reports to believe it.

Import Prices = -0.6 vs 0.0 f’cast,   [0.6 prev]

Export Prices = -0.4 vs 0.1 f’cast,    [0.9 prev]

Shelter inflation remains the biggest component of inflation, and the best way to solve that problem is new construction. It looks like input prices into residential construction have begun to stabilize, although we are still well above pre-pandemic levels.

After the Fed meeting and a couple of benign inflation reports, the December Fed Funds futures are now settling on two rate cuts this year.

Despite the stronger-than-expected economic data, the yield curve remains highly inverted, where it has been for the past 18 months. This is classic case of the inverted curve predicting 12 out of the last 7 recessions.

The notion of MBS underperforming Treasuries is front and center today–not because that underperformance is especially large, but mainly because MBS were often in the red while Treasuries were in the green.  We have nothing new to add to yesterday’s similar discussion of MBS underperformance., it was a boring day for bonds with modest gains for the long end of the yield curve (one major reason for MBS underperformance) and an uneventful, sideways grind in the afternoon.

UMBS closed the day down 5 bps at 100.72