[Matt] This is Matt Graham with the MBS live market update. Last week was an interesting one for the bond market coming off of the non-farm payrolls reading from September 6th. The bond market continued to move away from a 50bip fed rate cut in favor of a 25. And at first glance, this had a lot to do with the CPI reading that we got on Wednesday morning, it came in at 0.3 versus a 0.2 forecast and in the past, that’s been a pretty big deal for bonds. There’ve been many times where that’s been the dominant market mover of any given month, even when it’s just come in at a tenth of a percent higher than expected. In addition, the shelter component resurged, if you will, and that’s been a problematic ingredient in core services inflation and another reason that the bond market may have been moving toward a 25bip rate cut, except that it wasn’t the CPI data that did the trick. If you hyper analyze the minute by minute trading of Wednesday afternoon, Wednesday morning, you can see that most of the shift in fed funds futures took place in response to comments from two fed speakers, Williams and Waller and the Waller comments in particular took markets in both directions with the initial reaction being in favor of a 50bip cut and then the subsequent reaction having more to do with a Wall Street Journal article and comments saying, hey, Waller wasn’t really saying that he wants to cut 50bips. He was saying that they could cut 50 bps if data ends up warranting it in the future and the market took that. I’m sure some participants took that to mean that Nick Timrous had inside knowledge, even though that’s not the case. It was just a well written article that covered the same sort of bases that other smart people are covering. But some people believe that he has an inside track as to what the Fed will do and so they thought the Fed was telling him to send out that trial balloon and 50bip cut now over the weekend, there’s been a little bit more of a migration in that 50bip direction and we find ourselves at almost a two thirds chance of that on Wednesday that makes this Wednesday’s fed day a very interesting day. It was going to be already, but not necessarily because there’s still so much indecision about the size of the rate cut more so because it’s just the mark of a big shift in fed policy. We know the dot plot is going to change if anything’s going to move the market in a significant way on Wednesday, it’s probably the dot plot and again, that is the summary of every Fed members expectation of where the appropriate level of the Fed funds rate will be at various points in the future. In addition to the Fed, which is definitely this week’s headliner, we also have retail sales on Tuesday morning, a day before the Fed announcement, bonds are trading water at their best levels or near their best levels in more than a year. If the dot plot is favorable and the Fed conveys concern over economic momentum, then things could get even better. If the dot plot underwhelms relative to markets expectations, which there’s no published consensus for market expectations on the dot plot. Then we could easily retrace back up toward recent rates, which wouldn’t be that bad in the bigger picture and perhaps would be a good chance for things to consolidate and cool off and allow better gains in the longer term. That’s going to do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
