MBS down 23 bps and Stocks up 7

Many lenders are not yet out with prices for the day. Those who are could already be considering negative reprices as MBS are currently down just over 10 ticks (.31) after starting the day slightly stronger. Illiquidity is definitely exacerbating the move, but there’s still at least a quarter point of weakness from the highs. There are still no obvious market movers in play although we can see the volume begin to tick up just after 9:40am ET.

The week ahead will be dominated by the Fed decision, although we do have some important economic data. The Consumer Price Index will be released tomorrow, and that could impact the Fed’s decision. While the Fed Funds futures have a 74% chance of no increase, the markets are interpreting that as a “skip” not a “stop.” The July Fed Funds futures are assigning a 65% chance for a rate hike if nothing happens in June.

The dot plot will be critical. At the March meeting, the FOMC largely forecasted that the Fed Funds rate would be at the current level, with a few forecasts for higher rates.

UBS sent a note to its clients expecting a hard landing, with GDP set to contract 1% in the coming quarters. Their model sees a 80% recession risk

Tomorrow is CPI report. Market is expecting headline number at +0.2% which will be replacing .9% from last year. This would make the YoY number drop. Though doesn’t make being alive any cheaper. Core is expected to come in at +0.4% replacing 0.6% last year. Oil, cars, and shelter are expected to come down.

Then on Wednesday is the producer version, PPI.

Fed meeting starts tomorrow.

Bonds made it through the overnight session without any major drama but selling intensified shortly after the 9:30am NYSE open.  We have little to blame for the weakness apart from the general desire to price in a concession ahead of the 3 and 10yr auctions.  Every bit of that was needed considering 10s still managed to come in slightly higher in yield versus the ‘when-issued’ target (effectively a running forecast of the auction outcome).  Without the same supply backdrop to worry about, MBS logically outperformed.  Looked at another way, MBS outperformance helps confirm the market’s focus on Treasury supply.  CPI is out tomorrow morning.

MBS were up 9 bps on the day.   Stocks won 40 points.