Risks favor: Cautiously Floating

Current Price of FNMA 5.5% Bond: $101.44, +9bp

Brace yourself for another wild ride. This week’s economic calendar is steaming with volatile reports stacked every day. The reports include, Wednesday’s Fed rate announcement, Thursday's Core Personal Consumption Expenditure (PCE) Index and Friday's Jobs Report. That’s a huuuuge list. And how about the movements we saw last week. Every trading day had interest rate moves of at least a quarter percent…again, that’s in rate!

Kicking off the week was the New Home Sales Report for December, which came in at 604,000, below expectations of 645,000. The supply of new unsold homes rose to 9.6 months from November’s reading of 9.3 months.

At the height of last week's stock market panic sell-off, Fed Funds Futures traders were pricing in another 50bp rate cut by the Fed for when they meet this Wednesday. Now, however, the Fed Funds Futures have cooled and are pricing in just a 25bp rate cut. This has caused some uncertainty in the markets as to which way the Fed will go. With inflation still a real and present concern, it is very difficult to handicap this. And predictions from highly regarded economists range from no cut at all to a 75bp cut.

Speaking of the stock sell-off, was “rogue trader” Jerome Kerviel really solely responsible for costing French Bank Societe Generale $7.1 Billion Dollars…and for helping to trigger last week’s massive decline in the global Stock markets? Or is the junior trader being played a fool, becoming the scapegoat to cover up financial mismanagement by the bank itself? Supposedly – the French Bank had just uncovered massive losing positions caused by Kerviel, and decided to start selling off or “unwinding” these losing positions last Monday. Initially the loss was estimated at about 1.2 Billion British Pounds, but the decision to unwind the positions in a less liquid market, because our US markets were closed on Monday in observance of Martin Luther King Day, turned the loss into 3.7 Billion British Pounds or $7.1 Billion US Dollars. The media didn’t understand what happened and said the cause was that the global markets suddenly realized that the US was likely headed towards recession. But we accurately reported what really happened in MMG Weekly.