Tuesday – June 9, 2024
UMBS are flat on the open. Technically up 1 bps, but whatever.
Yields rose microscopically in the overnight session, but even that is a generous assessment considering the range in the 10yr was less than 3bps. Domestic hours are off to a sleepy start with yields in an even narrower 1bp range (essentially 4.29 to 4.30).
Powell’s testimony is about to begin, but as is the custom, a prepared speech is available in advance. Here are some of the bullet points highlighted by data aggregators:
FED’S POWELL: FIRST QUARTER DATA DID NOT SUPPORT THE GREATER CONFIDENCE IN INFLATION PATH THAT THE FED NEEDS TO CUT RATES
POWELL: EASING TOO LITTLE, LATE COULD UNDULY WEAKEN ECONOMY
POWELL: GDP GROWTH APPEARS TO HAVE MODERATED IN FIRST HALF `24
POWELL: EASING TOO SOON, TOO MUCH COULD HARM INFLATION PROGRESS
FED’S POWELL: A POLICY RATE CUT IS NOT APPROPRIATE UNTIL THE FED GAINS GREATER CONFIDENCE INFLATION HEADED SUSTAINABLY TOWARD 2%.
FED’S POWELL: WE HAVE MADE CONSIDERABLE PROGRESS TOWARD THE 2% INFLATION GOAL, RECENT MONTHLY READINGS SHOW MODEST FURTHER PROGRESS
Small Business Optimism improved in June to the second-highest reading this year. “Main Street remains pessimistic about the economy for the balance of the year. The Optimism Index stayed in a tight range around 90 (98 is the 50-year average). Only 8 percent expect business conditions to improve by year-end
Employers created a respectable 206,000 net June jobs, but April and May totals were reduced by a hefty 110,000 and the unemployment rate rose from 4% to 4.1%, its highest level since 11/21. While a July rate cut is unrealistic, the disturbing rise in the unemployment rate since the 4/23 low of 3.4%, along with steadily falling inflation, argues strongly for a September Fed rate cut. Policy is too restrictive.
A long-awaited pivot to easier policy would provide investors sitting on a record $6 trillion of money-
market with an incentive to buy bonds and other assets. “Until they see the Fed truly cutting, there is a level of show-me,” said Anders Persson, chief investment officer at Nuveen. “There’s some skepticism about getting off the cash or money market investments that pay 5% and many retail investors are sitting on and enjoying.”
Markets are pricing the chance of two rate cuts this year, with a roughly 70% chance of the first in September, according to swaps data compiled by Bloomberg.
Bonds showed slightly more notable signs of life this morning when compared to yesterday, but yesterday was all but dead. The volatility surrounded Fed Chair Powell’s congressional testimony but had more to do with what didn’t say as opposed to what he said. Specifically, he didn’t express incremental excitement or expectation about econ data justifying a rate cut any time soon, instead leaving it up to the same old “data dependent” mantra. Bonds had perhaps been hoping for a bit more dovishness. Even so, trading levels returned to pre-Powell levels by the close. 10yr Treasuries logged a small increase in yield while MBS improved modestly. Some of that is driven by the yield curve (shorter maturity Treasuries improved and MBS act more like 5s than 10s these days). Either way, the focus is even more firmly on Thursday’s CPI as far as bond market inspiration is concerned.
UMBS closed up 6 bps at 100.67