What Happened Last Week?
Negative Trend Overall, But Bonds Bounced Back
January has marked a modest but noticeable shift in bond market momentum and Friday provided the latest evidence. While most of the recent weakness can be viewed as a logical byproduct of decent economic data, there’s certainly also an element of momentum that seems to be in play. Friday’s evidence comes in the form of selling pressure that began right at the open. The 10am economic data added to the selling, but it was shaken off. There was modest weakness heading into the mid-day hours, but yields were nonetheless at their highest levels in more than a month.
Source: Matthew Graham, Mortgage News Daily 1/19/2024)
What’s on the Agenda for this Week?
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Central Bank Palooza, (2) Inflation Nation and (3) The Report Card.
(1) Central Bank Palooza: There will be key interest rate decisions and policy statements out of the Bank of Japan, the European Central Bank and the Bank of Canada. None of the Central Banks are expected to change their rates during this round of meetings, the markets will be focused on any guidance as to when the BofJ will raise rates and the ECB will cut rates.
(2) Inflation Nation: The Fed’s preferred measure of inflation (Core PCE) will be issued on Friday along with Personal Incomes and Spending. The market is expecting the MOM pace to increase from the prior month. The hotter this reading is, the worse it is for bonds and vice versa.
(3) Report Card: Our nation’s economic report card for the 4th quarter (aka GDP) is expected to drop from 4.9% in the 3rd quarter to 2.0% in the 4th.
Treasury Dump
This is a week of shorter term notes with the 2, 5 and 7-year note auctions.
Market Wrap-up
Domestic Flavor
Leading Indicators: The December Leading Economic Indicators (LEI) contracted by -0.1% versus estimates of -0.3%. However, it was the 21st straight MoM decline in the LEI (and 22st month of last 24).
On Deck for Tomorrow
Richmond Fed Manufacturing, 2 year note auction and Bank of Japan interest rate decision.