We are up 3 bps on the first hour of the day.  Seems like that has become the norm lately.  All the activity in the afternoon.

Day one of the two-day FOMC meeting gets under way today in Washington, DC., and though no change in the fed funds rate is expected, it’s a big week for central banks. The Bank of Japan’s meeting yielded expectations for an April rate hike, while the latest Bank of Canada announcement suggests an earlier initial rate cut than markets had priced in. An initial rate cut from the European Central Bank is expected in April, and our Fed is a coin toss for a March rate cut.

While the Federal Reserve seems to be convinced that it has done enough in the rate hike department, there are many who believe we are soon to bathe in the warm glow of renewed easy money. This is reflected in part in median rate forecasts, which now foresee the Treasury 10-year yield dropping to the 3.75% area by the 4th quarter. Assuming that the Optimal Blue 30-year mortgage rate maintains its trailing five-year average spread over the 10-year yield (about 230 basis points) this implies a 6.00% rate by the time Jack Skeleton and Santa Claus come around again.

Home prices fell month-over-month in November, according to the Case-Shiller Home Price Index. They were still up 5.1% on a year-over-year basis. We are seeing a tighter correlation between different MSAs.

Home prices rose 0.3% MOM in November, according to the FHFA House Price Index. They rose 6.6% on a YOY basis.

That said, we are seeing some dramatic price declines in some of the high-flying MSAs. San Francisco saw a 7.6% price decline in December.

The credit markets are getting more optimistic that we are going to avoid a hard landing. Credit spreads, which are the difference in yield between corporate bonds and Treasuries are falling, which means the cost of borrowing for corporations is falling.

Consumer confidence rose in January, according to the Conference Board’s Consumer confidence index. “January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor

Year-ahead inflationary expectations fell to 5.2%, which is the lowest since March 2020. I find it interesting that the Conference Board’s inflationary expectations are so much higher than the University of Michigan’s 2.9% estimate.

Job openings came in higher than expected this morning and immediately pushed bonds into weaker territory.  Fortunately, it wasn’t that big of a beat and bonds bounced back gradually by the end of the day.  That’s not to say all eyes were on data all day.  If anything, month-end trading and positioning considerations ahead of tomorrow’s events are just as relevant.  Those events include Treasury’s final quarterly refunding announcement in the AM and the Fed in the afternoon.  While we always need to be ready for big moves after the Fed, it’s hard to imagine what this announcement could do to be anything other than predictable.  The only wild card is a discussion on future changes to quantitative tightening in Powell’s press conference.

UMBS ended up 2 bps at 101.20.