Via Stephen Stanley at Amgerst Pierpont Securities:
What a difference a week makes. Last Monday, the market was pricing in less than 50-50 odds of a March rate hike and only 1 primary dealer economist (along with myself) was projecting a Fed move this month. By the end of the week, a carpet bombing campaign of jawboning by most of the FOMC, including all of the leadership, had finally convinced everyone that an increase is coming March 15. There is only one economic report that could conceivably derail the Fed now: the February employment release, due out Friday. As it happens, I look for an unusually strong set of results, including a 200K rise in payrolls, a downtick in the unemployment rate, and a rebound in average hourly earnings (likely +0.3% for the month). Obviously, that combination, or anything close to it, would only reinforce the FOMC’s resolve. Otherwise, it should be a relatively quiet week as we count down to March 15.
Shifting gears to the bond markets, it will be interesting to see where investors are willing to underwrite Treasury auctions of 3s, 10s, and 30s this week after the big backup in yields in the wake of the shift in thinking with respect to the Fed. On the MBS side, it is worth noting that the rise in mortgage rates since the election has sharply slowed the pace of refinancing activity. As a result, the rate of turnover in the Fed’s MBS portfolio has slowed noticeably. In the current two-week period, the Fed is only planning to buy about $12 billion in securities, down from an average of closer to $20 billion through much of 2016 and the slowest two-week purchase pace in almost a year.