Markets prepare for high volatility

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Published Date 2/26/2024

Overnight the 10 year note dipped to 4.22% -3 bps, but by the US session began the note was unchanged at 4.25%. Last week there very few data points to consider, this week there are several key reports led by Thursday’s PCE inflation data. Beginning this morning Treasury will auction 2s and 5s (11:30 am and 1 pm). Recent Treasury auctions haven’t met with strong demand, soft demand and bidding won’t sit well; last week Treasury sold 20 year bonds that met with the weakest demand we have seen in a long time, the result sent rates higher and MBS prices lower. Stock indexes in pre-open trading were generally quiet.

The last two weeks the bellwether 10 year notes has traded in a very narrow range, 4.33% to 4.20%, the tight range may be broken when markets see the PCE inflation report on Thursday, month over month both the overall and core are thought to be +0.4% while year/year both expected to decline from December reads. On top of the heavy calendar, the do-nothing Congress once again must kick the can by Friday to avert a partial shutdown as Treasury runs out of money, again.

At 9:30 am the DJIA opened +20, NASDAQ +34, S&P +6. 10 year at 9:30 am 4.25% unchanged. FNMA 6.0 30 year coupon at 9:30 am +3 bps from Friday’s close and +21 bps from 9:30 am Friday.

At 10 am January new home sales weaker than expected, at 661K against estimates of 685K, December sales revised to 651K from 664K. We will have details this afternoon.

Until Thursday it is reasonable to expect rates to continue in the narrow ranges, once PCE is released the likelihood that the 10 year note will breakout of its recent range.

There are a few Fed officials speaking later this week but don’t look for anything new. The Fed and its officials have made it abundantly clear there is no rush to lower rates; the nearest target markets now think is at the May FOMC meeting at the earliest. Inflation has come in hotter than thought, the Fed doesn’t want to cut too soon only to have to increase rates if inflation isn’t tamed. Markets have been debating when the Fed would cut, now it has sunk in with little debate about an earlier cut. On top of that the present level of the yield curve has mostly discounted two rate cuts at the present levels.

This Week’s Economic Calendar:

• Monday,

10 am January new home sales (685K, as released 661k)

11:30 am $63B 2 year note auction

1 pm $64B 5 year note auction

• Tuesday,

8:30 am January durable goods orders (month/month -4.5%, ex transportation +0.2%, core capital goods +0.1% from +0.3% in December)

9 am December Case/Shiller home price index (20 city +0.2% month/month, year/year +6.0%)

10 am February consumer confidence index (115.0 from 114.8)

1 pm $42B 7 year note auction

• Wednesday,

7 am weekly MBA mortgage applications

8:30 am Q4 GDP, second release (+3.3%, personal consumption expenditure4s +2.8%)

January advance US trade deficit (-$88.1B)

• Thursday,

8:30 am weekly jobless claims (210K from 201K the prior week)

January PCE (month/month +04% from +0.3%, year/year +2.4% from +2.6%; core PCE month/month +0.4% from +0.2%, year/year 2.8% from 2.9%)

January personal income (month/month +0.4% from +0.3%, personal spending +0.2% from +0.7%)

9:45 am February Chicago purchasing managers index (47.3 from 46.0)

10 am January pending home sales (+0.8% from +8.3%)

• Friday,

9:45 am PMI manufacturing index (51.5)

10 am February ISM manufacturing index (49.5 from 49.1)

University of Michigan consumer sentiment index (79.6, year/year inflation expectations 3.0%)

December construction spending (+0.2% from +0.9% in November)

Source: TBWS

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