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Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
MBS OVERVIEW
4:00 EST – Our benchmark FNMA MBS 6.00 May Coupon is down -12 BPS with 60 minutes left to trade.
Domestic Flavor: We had a very light day for economic data.
Inflation Nation: The NY Fed published the results of its April Survey of Consumer Expectations, which found that while inflation expectations at the one-year horizon decreased to 4.45% in April from the previous month’s 4.75%, longer-dated inflation expectations – at both the three- and five-year horizons – rose to 2.89% (from 2.78%) and 2.62% (from 2.54%), respectively.
It was quiet today in terms of movement in US financial markets. Digesting as usual what the Fed may do, the inflation data on Wednesday and Thursday, and the debt ceiling closing in. Janet Yellen sees “simply no good options” for solving the debt limit stalemate in Washington without Congress raising the cap. She even cautioned that resorting to the 14th Amendment would provoke a constitutional crisis. Swap markets move like lightning on any news, presently the market is expecting the Fed to begin lowering rates in November and Dec, in the meantime wishful thinking the Fed will pause until then. I don’t see reasons to believe that, but investors continue to look for sunshine in a cloudy world; on the other side, I don’t have any good reason to debate it.
Pimco co-founder Bill Gross doesn’t think inflation will hit 2% again in the US. He says it’s a “3-to-4 percent environment going forward for me.” It does appear that getting inflation back to 2.0% without driving the economy into recession is getting harder and harder to believe. Last Friday James Bullard, the Fed’s leading hawk, said he is willing to assess the economic data as it comes in, but would need to see “meaningful declines in inflation” to be convinced higher rates aren’t necessary, but believes no recession. “Yes, the economy could go into recession, but that’s not the base case,”…. “I think the base case is slow growth, probably a somewhat softer labor market and declining inflation.”
This afternoon the Fed’s Senior Loan Officer Opinion Survey signaled that the credit market was tightening, and business loan demand was weakening. The yield on the policy sensitive two-year Treasury rose to 4.00% as syndicate desks brace for corporate bond sales volume of as much as $35B this week. On the reaction to the data the interest sensitive 2 year note yield increased to 4.00% from 3.91% on Friday 9see below for 4 pm level.
The only data scheduled tomorrow, the April NFIB small business optimism index, a report that doesn’t normally get focus, the index expected at 89.7 from 90.1 in March. Treasury will begin this week’s refunding tomorrow with $40B of 3 year notes, Wednesday $35B of new 10 year notes, Thursday $21B of new 30s. NY Fed president John Williams at 12:00 pm tomorrow, same ole stuff with little reaction; markets getting full of all Fed comments.
When seen from the rear-view mirror you could have held every rate lock last week and not won or lost. That’s hindsight, in the moment there isn’t any reason to take on risk unless MBS prices improve through the day enough to trigger re-pricing. Betting on overnight movement is way too risky, once you have an unrealized loss emotion in this market is difficult to live with given all the current uncertainty. Take the April jobs, markets and media saw it as very strong because it beat forecasts, as we have noted when March and April jobs are averaged job growth in April doesn’t carry much water. Our techs still mostly neutral, rotating almost daily but no trending movement.
