MBS Day Ahead: Time to See How Europe Reacts to Fed

Who's reacting to whom?  We know that Europe is the primary source of upward pressure on rates over the past two months.  We also know the Fed's rate hike trajectory is a factor, but is admittedly harder to weight.  What we don't know is how much Europe will care about yesterday's FOMC events. 

If Europe cares at all, we should see that fairly early in the day.  If Europe cares in a good way, Treasuries and MBS can care all that much more about rallying.  The bullish possibility is that US and European market participants are interested in making big moves together.  In other words, if big momentum is going to come from one side of the Atlantic, the other side has learned it's safer and less costly to swim with that wave until it breaks. 

The negative/bearish possibility is the the US really doesn't have much control at all, or that Europe won't really care about an FOMC day that wasn't all that ground-breaking.  Further, the negative possibility is the German Bunds are still in the middle of a gentle landing in the .7-.8 area where they will meet resistance before heading back to break 1.0.  To top off that negative possibility, the following chart shows how that could happen with Treasuries merely having taken a diversion for FOMC day away from, and back toward German Bunds (the red line below)

The best thing we have going for us is that strong, positive moves after FOMC releases tend to be followed by sustained momentum in the same direction.  If we see that today, we can consider breathing a bit easier than we have for the past 2 months.  If we see the opposite, that would be scary--essentially confirming the game is over.  

If you missed yesterday's Fed dot plot changes, here's a handy visual of how Fed members changed their opinions on where rates will be over time.

There are several reasonably relevant pieces of economic data on tap today.  Keep in mind that this week of Jobless Claims covers the "survey week" for Nonfarm payrolls, and is thus seen as slightly more relevant than the average week of Jobless Claims.   Philly Fed is always a potential market mover, and any major deviation in CPI will be meaningful new information in light of yesterday's sober assessment on the growth outlook from the Fed.