CHM Blog

FOMC this afternoon. ADP reported private jobs better than expected, 239K against 200K estimates. Early trade on the 10 yr. -2 bp at 4.03%, MBS prices +3 bps from yesterday’s minor gain.

This afternoon the Fed will do what the markets are telling it to do, 75 bps then 50 bps then two 25 bp increases and by next April stop and think about lowering rates as the economy drops into recession. For all the belief that the Fed is an independent body charged with employment and inflation, when it gets down to it its what markets and huge investors want. Before the Fed went on its self-imposed lockdown that precedes each FOMC meeting most Fed officials were cautioning the Fed may have to keep going with big rate increases. Warning that fighting inflation is the primary focus and the Fed would do what must be done to cool it. So far it isn’t happening, inflation while not increasing isn’t decreasing either. In Europe inflation at over 10% and it will likely get worse as winter approaches. One thing that is constant with our central bank, it doesn’t like to go against market expectations most of the time.

The Fed should have an increasing concern about the markets’ ability to sustain increasing rates. Over the last two days some early signs of liquidity that appears to be increasing. Wild trade swings are indicative of lessening liquidity, it happened Monday afternoon and again yesterday with exceptional movement in treasuries driven by banks unable to provide liquid trading markets. Traders now planning strategy to camouflage their intentions to execute without tipping their hand before initiating large trades. One example yesterday, the difference in yield between the 5 yr. note and a 10 yr. note that still has 5 years left to maturity, the spread was excessively wide compared to historical comparisons.

The move today is less than one week away from the elections. Republicans have made high inflation a top issue and tried to pin blame on President Joe Biden and his party in Congress. Last week, two Democratic senators urged Powell to not cause unnecessary pain by raising rates too high. The employment market remains strong as evidenced this morning when ADP reported more jobs than expected, consumers based on the confidence index and U. of Michigan sentiment index show consumers increasingly believe inflation will continue. There will be two employment reports and two consumer-price reports before the Dec. 13-14 meeting. 30% of economists surveyed expect a dissent at the meeting. The most likely candidates would be Kansas City Fed President Esther George, who dissented in June in favor of a smaller hike, and St. Louis Fed President James Bullard, who dissented in March as a hawk. The Fed is likely to reiterate its plans to shrink its massive balance sheet at a pace of $1.1 trillion a year. Economists project that will bring the balance sheet to $8.5 trillion by year end, dropping to $6.7 trillion in December 2024. There will be no Fed quarterly projections at this meeting.

At 9:30 am the DJIA opened -94, NASDAQ -7, S&P -7. 10 yr. note -1 bp to 4.04%. FNMA 5.5 30 yr. coupon +5 bps from yesterday’s close and -20 bps from 9:30 am yesterday.

PRICES @ 10:00 AM

10 yr note: 4.04% unch

5 yr note: 4.26% -1 bp

2 Yr note: 4.55% unch

30 yr bond: 4.10% unch

Libor Rates: 1 mo 842%; 3 mo 4.459%; 6mo 4.918%; 1 yr 5.445% (11/1/22)

30 yr FNMA 6.0: @10:00 am 100.64 -3 bp (-22 bp from 9:30 am yesterday)

30 yr FNMA 5.5: @10:00 am 98.81 unch (-25 bp from 9:30 am yesterday)

30 yr GNMA 5.5: @10:00 am 99.48 -2 bp (-30 bp from 9:30 am yesterday)

Dollar/Yuan: $7.2828 +$0.0054

Dollar/Yen: 147.01 -1.23 yen

Dollar/Euro: $0.9889 +$0.0017

Dollar Index: 111.25 -0.23

Gold: $1658.40 +$8.70

Bitcoin: 20,405 -76

Crude Oil: $87.94 -$0.43

DJIA: 32,512 -141

NASDAQ: 10,825 -66

S&P 500: 3835 -21

Richard Sardella has been actively managing and providing services in the mortgage industry for over 30 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

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