Monday – February 6, 2023

MBS off 64 bps on the open. Market still reacting to Friday giant jobs miss. Have broken through 3 floors this morning early

Also got tougher talk from Bank of England and European Central Bank that the risk of doing too little for inflation is worse than the risk of doing too much.

People are hoping for guidance out of Powell’s speech tomorrow

The strong jobs report caused a more hawkish move in the Fed Funds futures. The march meeting is a lock for another 25 basis points, and there is a 73% chance for another 25 in May. Before the jobs report, investors saw a 40% chance of another hike this year. That said, the December futures see rates at the end of the year between 4.75% and 5%, which is 25 basis points higher than here.

Most of today’s market movement was in the books within the first half hour of domestic trading.  Long story short, global markets are suddenly scared of what Powell may have to say at Tuesday’s Q&A at a previously scheduled appearance.  Anxiety was/is amplified by the presence of a new round of 3/10/30yr Treasury auctions and a slew of corporate bond issuance adding to the supply side of the bond market equation for the week.

Earnings this week are scheduled to include: AP Moller-Maersk, Apollo Global Management, AstraZeneca, BNP Paribas, BP, CME Group, Duke Energy, KKR, Nintendo, PepsiCo, Semiconductor Manufacturing International, Siemens, SoftBank Group, Toyota Motor, Uber Technologies, Unilever, Walt Disney

Tuesday – February 7, 2023

UMBS 5.5 down 5 bps on the open.

Bond market movement has been mostly sideways in the overnight session with some early selling in the U.S. partially in response to comments from Fed’s Kashkari who offers a bit of window into the potential thinking of Powell. In short, the Fed is not done hiking rates yet.

Rates are on the higher side of our range, but we could see the bad news keep coming if we get a strong reaction to anything that Fed Chair Jerome Powell says today during a speech before the Economic Club of Washington this afternoon.

The affordability metric is (the monthly mortgage payment as a percentage of income) is above levels we saw during the bubble years, and compares to levels last seen in the early 1980s when the Fed took the Fed Funds rate into the teens to whip 1970s inflation.

 After much anticipation and defensive positioning, the bond market was finally able to hear from Powell in a less formal setting this afternoon–and importantly, AFTER last week’s jobs report.  The initial reaction was positive.  Powell said that while the jobs report was great, it wouldn’t have changed anything in his view.  This was worth a reaction rally, but not a sustained move.  If yields aren’t falling, they’re rising, so they moved back up to the highs of the day.  Fortunately, the weakness wasn’t/isn’t too onerous.  Unfortunately, the previous two days were a bit onerous and 10yr yields are now at their highest levels in about a month.


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