Mostly a Knee-Jerk Reaction to Fed Dots and Powell

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In one sentence, today’s Fed rate forecasts pushed bonds into weaker territory at 2pm and Jerome Powell’s press conference helped to recover most of the losses.

The forecasts showed a slightly higher probability of 4 rate hikes in 2018.  The average “dot” (so named for the dot plot on which the forecasts appear) also moved a hair higher in 2019 and 2020.  This was the key market mover at 2pm, even though the Fed announcement was heavily edited from its previous version.  It probably didn’t help that most of the edits were easier to argue as “unfriendly” for bonds.  That said, it would be harder to argue they were unexpected or unjustified. 

Powell’s press conference saw bonds bounce back and recover most of the losses, starting at 2:30pm.  He said he wasn’t at all concerned about inflation getting out of control, and he was so pleased with the strength of the economy that it doesn’t really leave room for anything other than disappointment or the mere meeting of expectations.  The tacit implication is that Fed policy is as tight as it’s going to get.  Or rather, the trajectory of Fed policy isn’t going to get any more onerous for bonds–a fact that was driven home by Powell saying we’re getting closer to a “neutral Fed funds rate.”

The ECB is up tomorrow morning, with just as much market movement potential as the Fed.  Their announcement is out at 7:45am, but the bigger to-do is typically the Draghi press conference which begins at 8:30am.


MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

MBS

FNMA 4.0

101-14 : -0-02

Treasuries

10 YR

2.9737 : +0.0167

Pricing as of 6/13/18 5:51PMEST

Today’s Reprice Alerts and Updates

3:34PM  :  Powell Presser Pushes Back on Dot-Driven Sell-Off

3:10PM  :  Breaking Down Massive Changes From The Fed

2:34PM  :  ALERT ISSUED: More Weakness, More Reprice Risk

2:03PM  :  ALERT ISSUED: First Move is Weaker After Fed

8:38AM  :  PPI Beats Big Enough to Cause Some Weakness


MBS Live Chat Highlights

Matthew Graham  :  “IOER is one of the ways they try to get the target to be reality.”

Matthew Graham  :  “the most important part of all that is that keeping IOER slightly lower is like a preemptive lifting of the foot off the accelerator of the rate hike cycle. The end is in sight. They’re trying to avoid overshooting with respect to “effective rate” (what the market actually does) and the target rate (the one they publish in their announcements).”

Hugh W. Page  :  “So, I forget MG. If IOER doesn’t go up along with the target FF Rate remind me what is the risk the Fed is trying to avoid?”

Hugh W. Page  :  “IOER Rate increase was only 5 bps less than typical right? Just a tweak really.”

Andy Pada, Jr.  :  “the equivocation is gone. suggests that if any of these markers don’t hit, then no rate hike”

Hugh W. Page  :  “Seems clear to me. We’re hiking and we’re going to continue to hike because growth is solid and although inflation is not spiking we want to make sure we get in front of it. But, some of the changes seem to indicate to me that later 2019 will be the time they perhaps take a pause. That’s my take.”

Andy Pada, Jr.  :  “a much bolder statement”

Hugh W. Page  :  “Interesting. quite a few changes to wording. Presser may be enlightening as well”

Matthew Graham  :  “MEDIAN VIEW OF APPROPRIATE FEDERAL FUNDS RATE AT END-2018 2.375 PCT (PREV 2.125 PCT); END-2019 3.125 (PREV 2.875 PCT): END-2020 3.375 (PREV 3.375 PCT) LONGER-RUN 2.875 PCT (PREV 2.875 PCT) – FED PROJECTIONS”

Matthew Graham  :  “FED SAYS INDICATORS OF LONGER-RUN INFLATION EXPECTATIONS ARE LITTLE CHANGED; DROPS PREVIOUS REFERENCES TO MARKET AND SURVEY-BASED MEASURES OF INFLATION OUTLOOK”

Matthew Graham  :  “FED SAYS FURTHER GRADUAL RATE INCREASES WILL BE CONSISTENT WITH SUSTAINED ECONOMIC GROWTH, STRONG LABOR MARKET AND INFLATION NEAR 2 PERCENT OVER MEDIUM TERM”

Matthew Graham  :  “FED REPEATS THAT STANCE OF MONETARY POLICY REMAINS ACCOMMODATIVE”

Matthew Graham  :  “FED SAYS ECONOMIC ACTIVITY RISING AT A SOLID RATE, PREVIOUSLY DESCRIBED GROWTH AS MODERATE”

Matthew Graham  :  “FED DROPS REFERENCE FROM PREVIOUS STATEMENTS THAT IT EXPECTED RATES TO BE BELOW NEUTRAL RATE FOR ‘SOME TIME'”

Matthew Graham  :  “FED RAISES TARGET INTEREST RATE TO 1.75-2.00 PCT, SEES TWO MORE RATE HIKES THIS YEAR FOR TOTAL OF FOUR, SEES THREE HIKES IN 2019”




Original Source