MBS Live Recap: Super Sideways Today Despite Stronger GDP

Bonds began the day with intensely sideways momentum intact.  That was the case all the way back to the 10am ET hour yesterday after yields rose in response to Draghi's press conference following the ECB announcement.  The ECB was this week's big to-do, as evidenced by a relative lack of response to this morning's GDP data (granted, there were also some caveats that detracted from the headline, like the 0.2% miss in Core PCE).

Our own central bank, the Federal Reserve, delivers its rate decision and policy announcement on Wednesday. The Fed is certain to cut its policy rate by 25bps--so certain, in fact, that the rate cut itself will not put any downward momentum on yields. It's already had that effect in advance over the previous weeks and months as it's been priced-in to current bond market levels.

Rather, the Fed's verbiage will be scrutinized for additional clues to how it will navigate the rate cut probabilities in the coming months. After all, the Fed has all but guaranteed a rate cut next week--something they're usually a bit more neutral about. Could they also indicate a few more cuts to follow? That might seem odd at first glance, but keep in mind that this rate cut is more for strategic reasons than for some short-term, tactical response to evolving conditions. The Fed has a hunch we're going to need rates to be a bit lower than they are now. That sort of hunch probably isn't satisfied by a single 25bp cut. All that remains to be seen is how aggressive they choose to be in communicating that fact.

In addition to the Fed, there's the large glut of top tier economic data that always pops on the first week of any given month.  Speaking of that, it's also "month-end" on Wednesday, which can introduce addition trading motivations regardless of underlying data.  All told, volatility potential is quite high.