UMBS down 28 bps early.  US equity futures fell on Monday along with stocks in Europe as a note of caution crept in at the start of a week marked by interest-rate decisions and big-name company earnings on both sides of the Atlantic.

Federal Reserve officials are expected to raise rates by a quarter percentage point on Wednesday, dialing back the size of the increase for a second straight meeting, after recent data suggested the central bank’s aggressive campaign to slow inflation is working. Signs of earnings pressure, however, are raising concerns about the health of the economy and the outlook for equities.

Right now there is a tug-of-war going on between markets and the Fed, with markets firmly pricing in a peak fed funds rate of 4.75% and rate cuts starting by November while the Fed is fighting to convince markets that rates will go higher and hold longer. The Fed has to be concerned that if markets start to rally it will bring about more inflation pressure, because of increased economic activity.

The Atlanta Fed’s GDP Now estimate for Q1 is a mere 0.7%. Note that the GDP Now estimate was significantly higher than the first estimate for Q4 GDP growth – about 60 basis points too high.  We also get Jobs on Wed and Friday.  Market looking for +175k

Jeffrey M. Lacker and Charles I. Plosser penned an op-ed in the Wall Street Journal about Fed policy and inflation. They discuss the use of rules like the Taylor Rule which calculate a Fed Funds target rate. Based on the inflation numbers we saw in December, these rules suggest the Fed Funds rate should be 8%.

While we only have two trading sessions left in January, unless agency mortgage bonds suffer from quite the shellacking over the next 48 hours we should see a record positive excess return for the US MBS index for the month. It currently stands at +1.20%, which is far above the +0.01% return seen for the month on average this millennium and the +0.56% record seen in 2009.


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