UMBS up 9 bps in early trading.

The week ahead will be dominated by inflation releases, which mean investor forecasts as to what the Federal Reserve is going to do over the near to medium term may jump around. We will start off with a rather minor player today at 11am ET — the NY Fed 1-Year Inflation Expectations index, which was 3% in its last release, before the CPI indexes are revealed on Tuesday, with the headline number expected to plunge to 2.9% annualized from 3.4% in the last report (when it was expected to come in at 3.2%) PPI and UMich will bring up the rear on Friday. Brace yourself for a bit of volatility.

Expectations for a Fed cut at the March meeting have now dropped below 20%, according to Fed funds futures, and there are now just 4.5 cumulative cuts priced in for the year as a whole, down from around six at the end of January.

There will be eight Fed tongues wagging this week with six of them voters, so there’s even more of a chance for the occasional headline driven spike in vol. This week will also see the release of the NAHB Housing Market index as well as housing starts and building permits on Thursday and Friday, respectively.

Single-family housing starts have exceeded a one-million annualized rate over the last two releases, and we need that to continue, rise even, to begin to chip away at the severe inventory shortage.

The week ahead will be all about the Consumer Price Index release tomorrow. The Street is looking for 0.2% MOM increase in the headline number and a 0.3% MOM increase in the core rate. This would translate into a 3% and 3.7% annual increase respectively.

Asking rents have stabilized, according to research from Redfin. In 2023, asking rents increased 1%, which is much less than the big spike we saw in 2022.

Monday was very much a placeholder in the grand scheme.  The same could be said for most of last week as well.  As the Fed and the market wait to refine their sense of the rate trajectory, there are only so many reports capable of setting the tone for weeks on end.

CPI is one of them and tomorrow’s installment will be the first true big ticket data since the jobs report.  It’s always tempting to imagine that there’s some way to reliably predict a slightly stronger or weaker result, but that same sentiment is shared by many other market participants and professional forecasters.

The net effect is a market that’s priced to perfection based on the forecast consensus.  Translation: it’s anyone’s game on Tuesday morning. We know the reaction could be big.  We do not know the direction.

UMBS closed the day up 3 bps at 100.70

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