While MBS and Treasuries gapped to weaker territory following the Fiscal Cliff stop-gap deal on the year’s first trading session, the bigger swings to the downside were on subsequent sessions. These came courtesy of the much-maligned FOMC Minutes and a moderately bullish Employment Situation report.
While it’s too late for those developments to avoid suggesting a longer term trend of rising yields, those sharp moves have progressively been made to look like the upper limits of that longer term range with subsequent “ratcheting” to better and better levels. The ratcheting continued overnight as Tokyo was back in action after yesterday’s market holiday. Asian markets were tepid, but positive for US Treasuries to kick off the overnight session, and Europe maintained a supportive backdrop into the domestic session.
Stateside, the morning opened with a speech from Boston Fed’s Rosengren, now a voter for 2013, who couldn’t have been more clear in saying “Continued monetary accommodation is absolutely appropriate and indeed needed as long as we are projected to miss on both elements of the Fed’s dual mandate, inflation and employment.” In later QA, he said he didn’t expected to be at the point of exiting an accommodative policy stance for “most of the year.”
Economic data was plentiful at 8:30, with Retail Sales leading the way. The stronger than expected headline there initially provided for a microscopic move higher in yield and equities futures, but the internals of the report suggested that much of the “beat” was driven by Autos and Gas (in fact, excluding those two, the report was right on target).
Combining those “yeah buts” on Retail Sales with the much weaker than expected Empire State Manufacturing Survey and unimportant Producer Price Index, and bond markets edged tot heir best levels of 2013, though still face an appreciable gap to get back to December 31st territory. Fannie 3.0s are up 6 ticks on the session at 104-18 and 10yr yields are down more than 3bps from 5pm levels to 1.8149.
Equities markets opened in weaker territory with SPs down about 5 points from yesterday’s close, but have been ticking very slightly higher in the first few minutes of the cash open for stocks. We’d also note that Bernanke’s speech last night offered no new points of view from the Fed Chairmen, which is exactly what bond markets needed to hear. In the absence of a firm push back against recent concerns stemming from the recent FOMC Minutes, Bernanke’s equanimity regarding the necessity and appropriateness of quantitative easing, combined with assurances that the Fed knows how to exit when the time is right, helped the slow and steady overnight improvements. It also potentially adds to the positive backdrop this morning and does so in such a way that markets haven’t had a major reactionary shift following his speech. Having had a chance to pile on to recent concerns about the QE discontinuation outlook, Bernanke simply stepped out of the way rhetorically, effectively saying “as you were” to bond markets.