MBS are down 13 bps on the open.  6.5 is down 19.

Global equities posted modest moves at the start of a busy week of economic data and central bank meetings

that will test optimism among investors that interest rates will soon head lower.   In currencies, the yen extended its losses to 1% after Bloomberg News reported that Bank of Japan officials see little need to rush into scrapping the world’s last negative interest rate, citing insufficient evidence of wage growth feeding inflation.

Traders are looking ahead to US inflation figures on Tuesday, a Federal Reserve policy decision Wednesday and retail sales numbers Thursday. Policy decisions at the European Central Bank and Bank of England add to a crowded calendar.

Friday’s jobs report has a lot of people talking about a soft landing once again. The labor market seems to be holding up despite the aggressive tightening policy we all saw. Consumer spending appears to be slowing and credit is tightening. If these things more or less pause here, then we have achieved the soft landing. The big question is whether all of that fiscal stimulus in 2020-2022 just delayed the inevitable instead of preventing it. FWIW, I am leaning towards the latter.

CPI will release Tomorrow morning followed by PPI Wednesday morning and the Fed decision Wednesday afternoon.  The markets expect the Fed to maintain interest rates at current levels. The Fed will release its new round of economic projections and the dot plot, so a lot of attention will be focused on how many rate cuts the Fed sees next year.

Nick Timaros (aka Nickileaks) is a reporter for the Wall Street Journal who is pretty plugged into the Fed’s thinking. He wrote a piece over the weekend which discussed the reasons why the Fed might start cutting rates. The most benign scenario is that inflation continues to fall, and with interest rates at high levels, real interest rates continue to rise. In this scenario, the Fed would be cutting rates simply to maintain the restrictive level of rates.

The other scenario is the hard landing scenario which usually accompanies such an aggressive tightening policy. We are seeing problems with the consumer, at least if you listen to what the publicly-traded retailers had to say about third quarter earnings. Credit is contracting as higher rates have drastically reduced the mark-to-market size of the capital base for banks.

Housing has been a big driver of inflation over the past few years, and it looks like rental inflation is cooling, and some of the hot markets of 2020-2022 have seen some big retracements is pricing, especially in places like San Francisco, Austin, Las Vegas and Phoenix.

It’s been quite a while since we’ve dusted off the ‘PSR’ abbreviation, which is short for “post-supply rally.”  The supply in question is the scheduled auction of US Treasuries.  At times in the past, merely getting through a set of Treasury auctions was often worth a sigh of relief, expressed in the form of additional bond buying.  While that dynamic hasn’t been as noticeable as it once was, today was an exception.  In other words, yields were a bit higher until a few minutes after the day’s last Treasury auction, but then began to fall almost all the way back to ‘unchanged.’ Even if they hadn’t fallen, today’s trading would leave the bond market in fine shape to digest Tuesday’s CPI data, one of this week’s two big ticket events.  The stakes are high, but the reaction function is simple: higher/lower inflation = higher/lower rates.

UMBS closed the day down 11 bps on the 6.0.