Wednesday – September 18, 2024
Mortgage Backed Securities opened down 19 bps this morning. Stocks flat too.
ITS FED DAY!!!
There are no new developments, headlines, or econ data driving the weakness. It is VERY broad-based and evenly distributed in terms of volume and volatility–the sort of thing we see when traders are progressively repositioning ahead of some big unknown (sort of like today’s Fed announcement).
Housing Starts = 1.356m vs 1.31m f’cast, [1.237m prev]
Building Permits = 1.475m vs 1.41m f’cast, [1.406m prev]
With split sentiment on the size of a potential first rate cut there could be a chance for some volatility. In addition to the announcement, the Fed is releasing their quarterly economic projections which will shed light on their anticipated policy through year end. The market has been trying to anticipate what the remainder of the year might look like, so this data will help provide a glimpse into what the Fed is projecting.
Builder Sentiment rose in August, according to the NAHB / Wells Fargo Housing Market Index. However, the cost of construction remains elevated relative to household budgets, holding back some enthusiasm for current housing market conditions. Moreover, builders will face competition from rising existing home inventory in many markets as the mortgage rate lock-in effect softens with lower mortgage rates.
Rate Cut: 50bps
Dots show 2 more cuts in 2024
2025 dots show 3.375 vs 4.125 previously
The Fed was either going to cut 0.50% or 0.25% today. It opted for the larger cut but the bond market LOST ground. For those who hadn’t tuned in over the past few weeks to learn why such things can happen, there were two potential reasons: the dot plot and Powell’s press conference. The dot plot was inoffensive and actually left bonds in slightly better shape. It was Powell’s press conference that caused the reversal this time. He didn’t show visible concern on the labor market.
He was clear to specify that 50bp isn’t the pace of cuts until further notice. He stayed well clear of declaring victory on inflation. And he reiterated that the “neutral rate” is probably “significantly higher” than before the pandemic. Combine all that with a bond market that had been in a relatively aggressive position heading into Fed Day and the moderately weaker closing levels are about as boring and logical a result as anyone could imagine.
UMBS closed down 14 bps at 101.42
