Market volatility high ahead of FOMC

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Published Date 5/3/2023

10 year note began this morning at 3.40%, -3 bps from yesterday: MBS prices unchanged from 4 pm ET yesterday. FOMC at 2 pm this afternoon, Jerome Powell at 2:30 pm. Expectations the same as has been the case for the last week, 25 bp increase then a pause. The Fed facing renewed concerns about the regional banking sector after it was thought to have run its course. Bank stocks are still slipping, First Republic Bank stock down 80%, other banks experiencing similar plights, weaker values. Multiple volatility halts in trading occurred on PacWest and Western Alliance Bancorp, and financials were down across the board yesterday. Former Federal Reserve Bank of Dallas President Robert Kaplan has added to the unease, saying the US regional banking crisis is far from over and calling for the Fed to pause rate hikes. Beside the Fed’s battle against inflation investors are moving to safety in treasuries.

One of the key issues facing banks, borrowing short and lending long, it worked for a while until short term rates began to increase a year ago, as short-term rates increased banks holding jumbos faced narrowing spreads. Michael Milken, infamous junk bond lender in the 80s, commenting today on CNBC, saying banks never learn that borrowing short term rates, lending long, has never worked out over the last 50 years.

At 8:15 am ADP reported private jobs, more than expected; jobs according to ADP increased 296K against forecasts of 143K. ADP has been losing its credibility between its data and BLS jobs data, it used to be close but recently not a good precursor for Private jobs to be reported on Friday (current estimates 153K)

At 9:30 am the DJIA opened +55, NASDAQ +19, S&P +5. 10 year at 3.40% -3 bps. FNMA 6.0 30 year coupon at 9:30 am +17 bps and +65 bps from 9:30 am yesterday, 6.0 30 year coupon +5 bps and +49 bp from 9:30 am yesterday.

At 9:45 am PMI April service sector index expected at 53.7, reported at 53.6.

At 10 am April ISM services sector index expected at 51.7 from 51.2, increased to 51.9 in April of 2023 from 51.2 in March.

Now we wait until 2 pm when the FOMC statement is released and Jerome Powell’s press conference at 2:30 pm.

The 10 at its low in its recent trading range at 3.40%, a break this afternoon would set the note decline to 3.30%, the fist technical target, from there it will depend on safety concerns coming from weakening economic forecasts that Powell is looking to lower inflation. The debt ceiling getting closer, Yellen saying June 1st is critical; doesn’t appear the there will be a new debt ceiling, what is more likely is a suspension of the debt ceiling until there is a consensus. The US is not going to default on its debt, neither Democrats nor Republicans want that calamity.

Source: TBWS

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