Tuesday – December 26, 2023

Back at it after the holiday.  The 6.0 coupon were down 5 bps early.  5.5 was flat.  6.5 was up 16 bps.

Markets are still digesting the data from Friday

Durable Goods = 5.4 vs 2.2 f’cast  [-5.1 prev]

Core Durable Goods = 0.8 vs 0.2 f’cast  [ -0.6 prev]

Core m/m PCE Inflation = 0.1 vs 0.2 f’cast  [0.2 prev]

Core y/y PCE = 3.2 vs 3.3 f’cast   [3.5 prev]

Recent PCE data and overall economic health suggests that the US personal sector is remaining strong leaving some to wonder if the current good costs can be sustained amidst high demand. If so, the Fed will likely continue with intentions to ease in the upcoming year with its current prescribed three rate cuts.

The futures see a Fed Funds rate of 3.75-4% as the most likely outcome with a 38% probability. A month ago, that was an outlier forecast, with only a 4% chance. The most likely forecast in late November was a Fed Funds rate between 4.5% and 4.75%, which is now an outlier, with only a 0.5% chance of happening. What a difference a month makes.

The market will close early Friday for New Years, leaving a very short trading week behind. There’s no doubt that food cost has increased this year as food inflation reached as high as 10-11% in 2022, spilling into 2023.

The FHFA House Price Index showed home prices rising 0.3% MOM in October, and 6.3% on a year-over-year basis.

Home price appreciation is accelerating, according to the latest Case-Shiller Home Price Index. Home prices rose 0.2% MOM and a 5.7% annual gain.

Oil rises after Red Sea ship incidents keep tensions in focus

We’ve seen other days this year where bonds have traded in a similarly narrow range, but none of those days boasted the exceptionally low volume seen today.  Even without it being an early close, it is still on track to being the lowest volume day of the year.  There was no reaction to the home price data this morning (nor would we expect that, even on a busy day), but the 2yr Treasury auction produced a bit of a response in shorter-term Treasuries.  10yr yields didn’t react much, but they were able to turn a microscopic loss into an improvement of similar proportions (i.e. less than 1bp lower on the day).

UMBS 6.0 ended the day up 3 bps.   The 5.5 was flat.  The 6.5 coupon picked up a whopping 22 bps