MBS are down 20 bps on the morning. Though mostly due to illiquidity. Stocks flat.

Bonds began the overnight session by losing ground in Asia. 10yr yields were as high as 3.857. Things changed when the EU PMI data began to hit just after 3am ET. It was weaker than expected across the board, prompting an immediate rally in EU and US bonds as well as a rally in stocks (due to the implications for central bank policy).

10s rallied down to 3.792 by the start of the domestic session, but have been drifting back in the other direction since then.

The Chicago Fed National Activity Index remained in negative territory last month, with most indicators suggesting a national slowdown. The CFNAI is sort of a meta-index that tracks some 85 economic indicators.

Of course, this week’s Main Event is the next rate decision by Powell & Co. on Wednesday. Investors expect another 25 basis point hike this time, which would bring the Fed funds target rate to 5.50%. I believe that should the Fed hike another 25 at this meeting (which I expect) they will then pause and observe financial markets and the economy to see how it handles all the tightening to date. Investors do expect about four rate cuts by the end of 2024, though, and doesn’t hope spring eternal?

Even should there be a recession, the central bank must consider that to revisit the QE playbook, to flood markets and the economy with another deluge of cheap credit despite inflation being where it is, will take its inflation fighting credibility and shred it. Their favorite inflation measure, the PCE, is running at 3.8% annualized, almost twice its stated inflation target of 2%. The PCE Core is running at 4.6%. This is one reason I don’t expect any rate cuts for some time to come; that and the fact Fed officials have been adamant that they will not stop until inflation is back down to their 2% target. After 500 basis points of increase in their target in a little over a year, I believe them.

The avg # of bids per home rose from 3.3x to 3.5x

33% of homes sold over list – up from 31%

76% of homes were on the market <1 month – up from 74%

Median days on market = 18

Zillow reported rent growth at 4.1% (was 4.8%) YoY.

Tomorrow we get Home appreciation data. Wed is New home sales and Fed. Thu is unemployment, durable goods, GDP. PCE coming on Friday.

Today’s most notable market movement surrounded European PMI data overnight.  Weaker PMIs prompted a swift rally in EU bonds and pulled Treasuries along for the ride.  Treasuries then spent the rest of the day pushing back in the other direction.  There were no compelling individual motivations for the weakness, but those grasping at straws might mention things like the Treasury auction cycle and the random volatility to which summertime Mondays and Fridays are prone.  Ultimately, the sell-off made for only a modest widening of the pre-Fed range with 10yr yield intraday highs less than 1bp higher than last Thursday.

At close, MBS down 14 bps.   Stocks up 18.3 points.