Bonds had a fairly uneventful overnight session with Treasuries rallying modestly at the start of the European session and pushing back into weaker territory starting at 7am ET. Neither of the moves were significant in the bigger picture as bonds have been broadly flat since last Thursday’s data-driven sell-off. Leading to MBS being up 2 bps early. Stocks down 6 points. Manufacturing contracted in June for the 8th consecutive month, according to the ISM Manufacturing Report. The weakness was across the board, with new orders, production, prices and employment all in contraction. Construction spending rose 0.9% MOM and 2.4% YOY to a seasonally adjusted annual rate of $1.93 trillion. Interestingly, residential construction was down over 11% on a year-over-year basis. Single family construction was down 11.6% while multi-family was up 20%. Federal Reserve officials were less united at their June meeting than their unanimous decision suggested, as some favored interest-rate increases but went along with the decision to leave policy unchanged. “Almost all participants judged it appropriate or acceptable to maintain the target range for the federal funds rate at 5% to 5.25%,” minutes from the June 13-14 meeting said. “Some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or that they could have supported such a proposal.” Officials supporting a hike cited tight labor markets and relatively few signs that inflation was slowing toward the 2% goal. Bonds sold off somewhat abruptly on Wednesday with little by way of overt justification. While it’s true that the Fed released the Minutes of its most recent meeting (3 weeks ago), there were no revelations and no new ways to think about the points that have been hammered home ad nauseum in recent weeks. Perhaps more important is the fact that the sell-off was largely over by the time the Fed Minutes came out. Were traders bracing for impact? It’s actually easier to imagine that sort of trepidation in advance of the next two days of economic data. After all, we know the Fed wants to resume its rate hikes if the economy evolves as expected and Thu/Fri data can do quite a lot to let us know how the economy is evolving. At end of day, MBS was down 25 bps. Stocks down about 9 points. MBS in a new trading range. Jobs reports will tell if this is the new range – or temporary

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