Wednesday March 17, 2010
Current Trend Direction: Sideways
Risks favor: Carefully Floating
Current Price of FNMA 4.5% Bond: $101.06, Unchanged
Top of the Mornin' to you…and Happy St. Patricks Day!Yesterday, the Fed Meeting offered little surprise, with no change to the Fed Funds Rate or the "exceptionally lowrates for an extended period of time" language, which gave Mortgage Bonds a nice19bp boost. In terms of the "Dissenters Club", Kansas City Fed Pres Thomas "BBQ" Hoenig is still the lone member, being the only formal dissenter to the Statement language continuing as status quo. But as we've said - many other Fed members are voicing concerns as well, which should make the Meeting Minutes interesting when they arrive in a few weeks from now. So far today, Bond prices are battling to hold on to yesterday's gains.
The Producer Price Index (PPI), which gauges inflation at the wholesale level, fell by -0.6% in February, well below the -0.2% drop anticipated and marked the largest monthly decline since July 2009. This left the year-over-year headline PPI at 4.4%, down from January's 4.6% reading. The Core PPI, which excludes food and energy prices, rose by 0.1% in February, inline with estimates. The Core PPI year-over-year rate is 1.0%, matching January’s annual increase. Producer Price changes do not always trickle down to the consumer level, so the markets pay attention, but seldom overreact. Tomorrow's Consumer Price Index typically garners greater market reaction.
At 2:00pm ET today, Fed Chair Ben Bernanke and Former Fed Chair Paul Volcker will be speaking in front of the House Financial Services Committee. Big Ben will be defending the role of the Fed in supervising small banks and monetary policy decision making.
His prepared speech and question and answer session comes right on the heels of Christopher Dodd unveiling a financial overhaul bill, which has a provision to transfer oversight of all state-chartered banks and bank holding companies with less that $50B in assets from the Fed to the Federal Deposit Insurance Corporation (FDIC). At the moment, there are thousands of banks that would fit this criteria, and be removed from the Fed's jurisdiction.
His prepared speech and question and answer session comes right on the heels of Christopher Dodd unveiling a financial overhaul bill, which has a provision to transfer oversight of all state-chartered banks and bank holding companies with less that $50B in assets from the Fed to the Federal Deposit Insurance Corporation (FDIC). At the moment, there are thousands of banks that would fit this criteria, and be removed from the Fed's jurisdiction.
Mr. Bernanke argues that "the insights provided by our role in supervising a range of banks, including community banks, significantly increases our effectiveness in making monetary policy and fostering financial stability…". The Fed's independence has recently come under attack by some politicians - and history tells us that this is a very dangerous game. Central Bank independence is indeed vital to financial stability, and was the focal point of Mr. Bernanke's recent confirmation speech.
Bonds are lucky to presently have a triple layer floor of support formed by the 25, 50, and 100-day Moving Averages. For now, we can continue to Float as long as the Bond can remain above support.
