Good Morning All. Wake Up West Coast!
The Fed didnt offer up much new guidance yesterday. Actually I dont want to say they totally crapped the bed.... they did draw out the end of the TSY purchase program....which turned out to be a net plus for MBS. Overall it was a STATUS QUO statement though.
Unfortunately this left us scratching our head (still)....wondering when we might see some resemblance of fundamentals return to the marketplace. Oh well...I suppose until then we will continue to avoid over analyzing data in favor of pacing trading flows and tracking technicals.
WHOA WHOA WHOA WHOA WHOA WHOA WHOA WHOA WHOA WHOA WHOA WHOA WHOA WHOA....WHOA...WHOA. THIS IS NOT MY BATMAN GLASS LOIS
LAUGH!
There was one tidbit of interest in the FOMC statement..."Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit."
The Fed added "sluggish income growth" to their inventory of anxieties. Last month this concern was not included in the statement.
I
dont want to say this alteration will alter trading strategies in the
short term (did it this AM?)....however I am willing to state that it
will resonate in the minds of market participants. Dare I say
fundamentals are attempting to make their way back into the morning
meeting? Dont get it twisted, MG and I dont totally ignore
data...no no....we at least give it a passing glance...if results fall
within the acceptable range of expectations, we divert our attention
back to trade flows and market profile.
The addition of this verbiage, "sluggish income growth",
stood out to us though. It confirms the Fed's growing concern that a
consumer led recovery is becoming more and more elusive. Remember:
consumer spending is the fuel that drives domestic economic
output...without wage growth, prices will have to fall to spark
shrinking consumer demand, which would restrain recovery efforts and
possibly lead to a deflationary spiral. In the big picture the Fed's
issue is JOB CREATION. Aggressive monetary policy and fiscal stimulus
managed to slow the second derivative (rate of change of the rate of
change....the pace that the economy was contracting).....but what now?
The labor market and long term economic growth are clearly a major
concern of the Federal Reserve.
We know we've made our outlook quite clear...housing is due for a long drawn out recovery process, the labor market will remain weak as companies keep costs at a minimum (low breakevens)...economic growth will stagnate as consumers rebuild wealth and restore credit. (We see credit reports on a daily basis...the proof is in the pudding...consumers are struggling).
All that said....since stocks have recovered from worst case scenario price levels (October to March selloff)......perhaps now the market begins to pay closer attention to the long term fundamentals?
I dont know . Maybe? The future of economic output remains a mystery. It's still a Trader's World, and We're Still Living in It....but just maybe, one of these days, one of those "fundamentals" breaks the back of a month long equity rally...pushing the flight to safety bid into TSYs...leading MBS prices higher and mortgage rates back in the 4.00 handle. Just maybe thats what we are waiting for...money can be made on the short side trade too!
PS...if you are worried about inflation. We just dont see it being an issue....not with diminished aggregate demand and stagnate wages. (re: lax monetary policy argument...see excess reserves in banking system)
There's your long term lock outlook.
Onto the today...TECHNICAL TRADING DOMINATES...kinda.
The weak retail sales print and higher jobless claims number gave bond traders a boost this AM (CONSUMER NOT HEALTHY...LABOR MARKET POOPY). The reason I said "kinda" is because stocks are acting indecisive about their willingness to move in either direction (WE KNOW THEY WANT TO MOVE LOWER...darn rally chasers). Following the apathetic economic indicators stocks moved lower, but it wasnt long before a bounce restored status quo. This time 1,000 held...and we are right back to testing the highs of the day.
Boohiss for bonds? Ehhhh...not so much. When you put it in perspective...the 10 yr is holding steady while stocks test 2009 highs (AGAIN).
Here is longer term technical significance. Bouncing back and forth between 23% and 38% retracement of July yield lows....BANG BANG
For MBS...yesterday afternoon we saw decent buying activity after a brutal morning. Servicers were repositioning portfolios to account for longer cash flows via the down in coupon trad (they bought FN 4.5s!). Relative value players like hedge funds were day trading most of the day...sellers in the AM buyers in the PM(5.0s). Meanwhile money managers headed up in coupon post FOMC statement. The early afternoon spike in volatility made for profitable price behavior for AM sellers....however after the FOMC statement vols ticked lower and supportive influences took over for "rate sheet influential" MBS coupons. YAY down in coupon!
This morning that momentum has carried over...however as servicers appear to be adequately hedge..."rate sheet influential" MBS coupons are currently taking their directional guidance from the gyrations of the yield curve with a little spread tightening help from official buying powers of the Fed..but remain wary of profit takers, waiting for 1pm 30 yr Bond auction.
Even though stocks are testing new highs..our trend channel is holding together.
The Treasury will auction $15billion 30 yr bonds at 1pm. Here's a look at recent results...
Currently the 10s/30s section of the yield curve is steepening as 30s are outperformed by 10s. This signals traders setting up for the auction....is this outperformance enough? Dont know but if fundamentals are to return to the market then it would make sense for traders to bid this offering...especially right before CPI in the morning.
As earlier suggested (SLUGGISH INCOME GROWTH) we are waiting/hoping the market to finds its way back to fundamentals...perhaps the demand at this auction will give us some guidance as to whether or not this is occurring.Logic has yet to return though...its still a traders world. Supply is supply and if they miss this auction there is always another one next month.
Plain and Simple: Wouldnt be surprised if bidders demand higher yields...but demand should be there. Still defensive....waiting for stocks to return to reality. Waiting for market to find fundamentals
Rate sheets are a bit better again this morning after yesterdays rally carried over into today. Mortgage Rates are slightly lower.
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