Good Monday AM,

Great opening paragraph:

Last Thursday and Friday the 10 yr. note declined 26 bps and MBS prices jumped 90 bps (4.5 coupon). The FOMC will release the policy statement on Wednesday afternoon with an increase of 75 bps, totally expected. The markets gathering around the idea that the Sept FOMC meeting may be the last this year, a growing belief that inflation has peaked at 9.1% CPI in June and will slowly decline. Interesting, until recently the consensus had been that the Fed’s main inflation gauge was the PCE (personal consumption expenditures); now traders believe the Fed is more focused on the monthly CPI that increased 9.1% in June while the June PCE to be released on Friday is expected +6.7%. The equity markets were the usual volatile trade last week but the three key indexes managed a gain.

Gasoline prices have fallen around 10% from their mid-June high point, wheat futures prices have fallen by 37% since mid-May and corn futures prices are down 27% from mid-June. The cost of shipping goods from East Asia to the U.S. West Coast is 11.4% lower than a month ago. Easing price pressures and improvements in backlogs and supplier delivery times in business surveys suggest that supply-chain snarls are unraveling.

From the WSJ:

As the Federal Reserve prepares to meet this week, Wall Street investors are betting that officials will raise interest rates and then turn around and start cutting them in six months. The unusual wager reflects investors’ growing sense that the Fed is driving the economy into a recession as it tries to fight inflation, analysts said. At the same time, by constraining longer-term borrowing costs, it makes a recession slightly less likely to happen soon. That is a boost to riskier assets such as stocks, compared with a more traditional bet that rates wouldn’t boomerang so quickly. Bets on the future course of short-term interest rates play a decisive role in determining yields on U.S. government bonds. Those in turn set a floor on borrowing costs across the economy, with higher yields curbing growth and lower yields boosting it.

On top of the Fed announcement on Wednesday, this week is full of data which will add to the volatility.

New Home sales, Consumer confidence, Pending Home Sales, GDP, and Treasury auctions will all add to the fun. I would expect most of the economic data to miss to the downside which would likely help rates but we will see. It is all about expectations (and mostly around oil prices). The spready between the 2yr treasury and the 10 yr Treasury (the Ted spread) is about as wide as I have seen it at. Now inverted by 27bps. I cannot stress how significant that metric is when looking at the future expectations for rates. I do think rates will be improving through the end of the year.

Please remain safe and healthy, make today great!