UMBS up 23 bps on the open today.  S&P futures down 14.75 on the open.

Equities fell, Treasuries rose and oil topped $90 a barrel on concern the war between Israel and Hamas may widen to a regional conflict.   Investors were rattled by reports of more clashes in the Middle East, with the Pentagon saying it’s seeing an increase in drone attacks in Iraq and Syria. An American destroyer also shot down cruise missiles and drones launched by Yemen-based Houthi militants toward Israel. Traders were also parsing the latest batch of third-quarter corporate results.

Jerome Powell’s speech yesterday was interpreted as hawkish despite some sentences that could be considered dovish.  We also got comments from the Fed’s Bostic:  I don’t think the Fed will cut rates before middle of next year.  Fed Harker repeated that now is the time to hold rates steady.  He thinks inflation/economy is easing faster than thought.  

Unfortunately, bond market sentiment is so awful right now that even neutral data / comments is considered bearish. This is often typical at the end of bear markets. The markets seemed to seize on the comment that “monetary policy is not too tight right now.”

The last month has seen an extraordinarily heavy amount of US issuance ($580 billion in the past 30 days) which works out to be an annualized pace of $6.9 trillion or about 3.8x 2022 issuance. The last month’s issuance probably won’t be repeated, although it pushed 10 year yields to multi-decade highs.

The Atlanta Fed’s GDP Now estimate for Q3 is still above 5%. To me that doesn’t square with any of the other data we are seeing

Zillow is predicting a 3.3% full year appreciation rate in 2023 – revised lower from 4.3%.  They predict 2.1% next year.

Rates fell noticeably on 3 out of the last 4 Fridays (not counting today).  In all 3 cases, the subsequent Monday saw a sharp correction back toward higher levels. Now today, bonds rallied fairly well after a week of steady selling.  Is it just a token Friday correction or something that actually carries some weight going forward?  There are ways to make cases for both outcomes.  We can see the tone shift from the Fed and perhaps some “value buying” at the 5% level in 10yr Treasuries, but it would be impossible to get very excited about Friday gains that occur the day after hitting the highest yields in more than a decade.  In any event, all crystal ballers should be falling back on the old, familiar, “data dependent” mantra.  The only catch is that the upcoming week of data doesn’t really cut it in terms of big picture significance.

UMBS closed up 19 bps – closing at 96.69

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