UMBS starting the week down 11 bps – S&P futures up 24 – this morning.
The uncommon combination of events and the market movement potential of this week is hard to overstate. Each layer is important in and of itself, but they combine to form something unique. Layers include the typically important slate of early-month economic data (ISM, JOLTS, ADP, NFP), a Fed announcement that may all but confirm the ceiling is in, the quarterly announcement of Treasury auction sizes, and a Bank of Japan announcement that may well produce another policy change that impacts US rates, all against the backdrop of an ongoing technical test of the 5% ceiling in 10yr yields.
Wall Street Journal Fed-whisperer Nick Timaros suggests that the big increase in long-term yields over the past two months gives the Fed the leeway to stop hiking rates as the jump in long-term rates has the effect of two or three hikes in the Fed Funds rate.
The December Fed Funds futures are a lock for no change at this week’s meeting, and they have been quietly reducing the probability for a hike in December. We now stand at a 25% chance of a rate hike in December versus a 33% chance a month ago.
Friday’s jobs report will probably include some noise from the UAW strikes. It looks like they have an agreement in principle with the Big 3. The UAW was able to get a 25% increase over 4 years and automatic cost-of-living adjustments. The union was seeking a 40% increase while the auto companies were offering 15%. The union demands for a return to the old social contract, including defined benefit pension plans, and a 32 hour workweek (with pay for 40) didn’t go anywhere.
Note that pharmacists are going on strike as well at CVS and Walgreens.
U.S. TREASURY SAYS IT EXPECTS TO BORROW $776 BLN IN NET MARKETABLE DEBT FOR OCTOBER-DECEMBER PERIOD, DOWN $76 BLN FROM JULY 2023 ESTIMATE
Treasury announced a slight decrease in Treasury issuance just now (here: https://home.treasury.gov/news/press-releases/jy1851 ).
This is one of two releases that bonds were waiting to see on this topic. The other arrives Wednesday morning, but it is made less threatening by the overall decrease in issuance. 10yr yields have rallied a few bps on the news
On what has the potential to be a momentous week, the bond market has cleared its first major hurdle and is no worse for the wear. Treasury released the first of two issuance announcements this afternoon, showing a $76 billion decrease versus the July estimate. That decrease should be partially finalized on Wednesday morning when specific auction sizes are announced. Bonds had been slightly weaker in advance of the news and made modest gains in its wake. It is best to think of this outcome as a “cleared hurdle” as opposed to the race being won. There are more challenging hurdles in the coming days. Those will determine the race, but this is a good start nonetheless. Events and volatility potential only increase from here.
UMBS 6.5 closed down 5 bps at 99.27.