In the morning, MBS were up 11 bps. Treasury down 13. Stocks down 25 points early.

After being closed for the May Day holiday, EU markets were back in action this morning. Data highlights included weaker German retail sales, generally flat manufacturing PMIs, and an unexpected drop in core inflation against the backdrop of higher headline CPI in Italy. The net effect was a moderately big rally at the start of the EU session–one that pulled US yields down

The Fed starts its meeting today, but will break and release its rate and policy statement tomorrow followed by Fed Chair Jerome Powell’s press conference. Right now markets have priced in a .25 rate hike at this meeting, and all eyes will be looking for signals of if the Fed will now pause after what will be the 10th rate hike in a row. Markets right now are pricing in a pause after this hike, with the Fed rate expected to stay at 5% till at least November before seeing a couple of small rate cuts by the end of the year. Based on the current speculation of markets on the Fed, we would have to see some really hawkish comments to push rates much higher from here.

Fannie Mae announced its results this morning for the first quarter of 2023. $3.8 billion of net income for the first quarter 2023, with net worth reaching $64.0 billion as of March 31, 2023. Net income increased $2.3 billion in the first quarter of 2023 compared with the fourth quarter of 2022, primarily driven by a $3.2 billion decrease in provision for credit losses. $78 billion in liquidity provided to the mortgage market in the first quarter of 2023.

The number of job openings decreased to 9.6 million, according to the latest JOLTS jobs report. This was down 384,000 from February and 1.6 million from December 31. The quits rate, which tends to predict wage inflation, fell to 2.5%. The quits rate was 2.9% a year ago.

Construction spending rose 0.3% MOM in February, according to Census. This was up 3.8% compared to a year ago. Residential construction spending was down 0.2% MOM and 10% on a YOY basis. It is interesting how much single family and multi-family construction spending has diverged.

Bonds completely erased yesterday’s snowball sell-off with an even bigger snowball rally in the mid-morning hours.  Motivations were twofold.  Drama began at 9:30 as bank stocks began to tank, ultimately resulting in several of them being halted.  Treasuries were already following that flight-to-safety trade when the JOLTS data came in on the soft side, further underscoring a potential cooling in the labor market.  By those powers combined, bond buyers scurried to get into position for what suddenly looked like it might be a friendlier Fed tomorrow afternoon.

At the end of the day, MBS were down 19 bps.  Stocks were worse 48 points.   The 10 year treasury lost 16 basis points

Separately, the Fed’s review of the Silicon Valley Bank situation is out. It basically lays the blame on deregulation and limiting the regulatory burden on the banking system: “In the interviews for this report, staff repeatedly mentioned changes in expectations and practices, including pressure to reduce burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory action,” the report says, adding that this may have “in some cases led staff not to take action.”

I still find the fact that the Fed didn’t even consider the scenario of rising interest rates in its stress tests to be the biggest surprise. Especially since their policies made that scenario happen.

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