Monday – December 16, 2024

UMBS flat on the open.  Stock futures up 13.75 points

Bonds drifted to slightly stronger levels in the overnight session, but began giving back the gains shortly after 8am ET.  The just-released S&P Services PMI has done more than anything to contribute to that as it bumped 10yr yields quickly into negative territory.  10s are now up 0.2bps at 4.393.

NY Fed Manufacturing = 20 vs 12 f’cast,     [31.2 prev]

S&P Services PMI = 58.5 vs 55.7 f’cast,    [56.1 prev]

The week ahead will be dominated by the FOMC meeting on Tuesday and Wednesday. We will also get housing data with housing starts and existing home sales. Finally, we will get the PCE inflation data on Friday (although it won’t matter much coming after the Fed decision). With Christmas and New Years landing in mid-week, markets should be pretty slow after that.

Nick Timaros of the Wall Street Journal (aka Nikileaks) is out with an article this morning saying the Fed is ready to pause or dramatically slow further interest rate cuts. A few voting members have given indications they would argue against cuts this week.

The growth in asset prices (particularly the stock market and Bitcoin) is another factor in the Fed’s decision. In theory, these markets shouldn’t matter to the Fed (their mandate is goods / services inflation and unemployment) but shelter is a big component of inflation.

As I mentioned in Friday’s post – the Fed Funds futures are already signaling the Fed will slow rate cuts next year, so in many ways this is redundant. The Fed Funds futures are much more cautious than the September dot plot which saw the 2025 Fed Funds rate in the 3.0% – 3.5% range. The current futures forecast sees the 2025 Fed Funds rate in the 3.75% – 4.0% range, so the markets are already forecasting what Nick suggests.

The article also mentions that potential tariffs could sway the FOMC to slow rate cuts.

If there was a prime directive for the bond market last week, it was to sell off regardless of any counterargument from the economic data.  The new week got off to a distinctly different start with stronger economic data only causing a temporary inconvenience for bonds.  Both MBS and Treasuries were pushed back in line with Friday’s weakest level, but both found support in the PM hours before going on to make it back to unchanged territory, or close to it.  Volume was low and the volatility was small in the bigger picture, but at the very least, it was nice to see a different reaction than last week’s default weakness.

UMBS closed the day pretty much flat.  Down 1 bp at 99.27.

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