UMBS were up 5 bps early in trading this Monday.  Stock futures down 2.
Bonds were moderately stronger in the overnight session without any excitement in terms of data or headlines apart from a Bloomberg article on former NY Fed Pres Bill Dudley discussing the case for a 50bp Fed rate cut this week.  This had a bigger impact on the shorter part of the yield curve, but nonetheless helped MBS begin the day about 5 ticks (.16) higher.

The NY Fed data (aka Empire State Manufacturing) isn’t a perennial favorite in terms of market movement capability.  It occasionally has a modest impact, but we wouldn’t necessarily have expected it to remind us of that capability in the current market environment.  To be fair, it didn’t make much of a dent this morning, but the volume and volatility at 8:30am are fairly conclusive.  It was worth just under 2bps of weakness in 10yr yields and not quite an eighth of a point of weakness in MBS.

The week ahead will be dominated by the FOMC meeting on Tuesday and Wednesday, where the Fed is expected to cut rates. The Fed Funds futures have again changed their forecast, with the markets now seeing a 65% chance of a 50 basis point cut and a 35% chance of a 25 basis point cut. Last week, the futures were leaning heavily towards 25 basis points.

The Fed Funds futures moved from a 15% chance of a 50 basis point cut to a 50% chance, so the assassination attempt isn’t the driver here. Given that we were in the quiet period ahead of the FOMC meeting, there wasn’t any communication from the Fed either. Something spooked the herd, and now they are on the 50 basis point side of the field. The UM consumer sentiment number was good, so it wasn’t that.

Aside from the FOMC meeting, we get housing data with the NAHB Housing Market Index, existing home sales, and housing starts. We will also get retail sales and the Index of Leading Economic Indicators. With the Fed now in a rate cutting cycle, inflation indicators will become less of a driver of sentiment.

Bonds started stronger, retraced back to ‘unchanged’ following the manufacturing data, and proceeded to grind out moderate gains by the end of the day.  It was a reasonably strong result given the absence of bullish impetus for bonds, but not one that falls outside the range of yields established during last week’s volatile consolidation.

Fed Funds Futures notably rallied such that the 50bp rate cut is once again the leading candidate.  This is a product of trader ruminations and speculation rather than the data.  Between Timiraos’s article last week, and Dudley’s this morning, the market thinks it’s being given clues from insiders.

UMBS ended the day up 6 bps at 101.60