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.

Wednesday - December 11, 2024

UMBS opened UP 13 bps this morning.   S&P futures up 21 points.

Bonds have already rallied from 4.25 to 4.215 in the wake of the CPI data, and that's a testament to the market's level of interest in today's data.  We can only imagine how big the reaction would be if there were a big departure from expectations.  Even the unrounded core m/m level was less than 1/100th of a percent from forecasts.

If anything is tipping the scales in the favor of this bond rally, it's the resumption of the trend lower in the shelter component.

Core M/M CPI = 0.3 vs 0.3 f'cast,     [0.3 prev]

unrounded, 0.308

Core  Y/Y CPI = 3.3 vs 3.3 f'cast,    [3.3 prev]

Shelter CPI M/M =  0.336 vs .382 prev

Food was a big driver of the increase, rising 0.4% MOM. Energy helped pull down the index. The index for shelter rose 0.3%.

Overall, the CPI reading probably doesn't change the Fed's thought process going into next week's FOMC meeting. The Fed Funds futures agree, seeing a 25 basis point rate cut as basically a sure thing.

The median asking rent fell 0.7% YOY to $1,595, according to research from Redfin. Some erstwhile high-flying MSAs like Austin TX reported the biggest decreases, while the lagging MSAs like Cleveland OH saw the biggest increases. Austin rents fell over 12% on a YOY basis. Tampa, Raleigh and Nashville reported big decreases as well.

It was a day for "explanations" in the bond market with the morning rally needing to be explained in the context of CPI data that came in right on the screws and a subsequent sell-off that also seemed to happen for no apparent reason.  In fact, selling continued even after the well-received 10yr Treasury auction. To some extent, the AM selling can be tied to the Bank of Canada announcement, which was universally panned as ultra-hawkish (despite a 0.50% rate cut).

The continued selling is more mysterious and can only really be explained with curve trading and repositioning following the AM CPI data. The big clue: Fed Funds Futures for next week rallied and never sold off.  But the farther one moves into the future, the bigger the reversal became. Bottom line, traders sold long term bonds to buy the shortest term debt and the buying hasn't even necessarily taken place yet.

UMBS closed the day down 15 bps at 99.81.

From www.WellThatMakesSense.com

WTMS Blog Today = Yeah But......Daytime Power Naps.

There is a bunch of science says you should encourage your employees to take a nap. There is a bunch of old-heads that thing that is a terrible idea.

What's YOUR priority? Productivity or Perception. Let's discuss both sides of the topic