Risks Favor: Cautiously Floating

Current Price of FNMA 6% Bond: $100.25, +25bp

Mortgage Bonds are trading in positive territory so far this morning, as the Stock market is moving lower causing money to flow over into Bonds.

Pressuring Stocks lower was news from delivery giant UPS, which issued a profit warning. The reason this is of great concern to the Stock market and overall economy is because much of commerce is done through shipping giants like UPS, so less shipping means less sales and less sales means continued weakness in the economy. Of course, Bonds liked this news.

Additionally, Dow Chemical is saying they will have to raise product prices by as much as 25% as CEO Andrew “The Liverman” Liveris cited a “continuing relentless rise in the cost of energy and hydrocarbon feedstocks.” Oil prices are pushing record levels once again at $139/barrel, which will be bad news for both Stocks and Bonds, and could cap any major advances for Bonds today.

Consumer Confidence for June was reported at 50.4, well below expectations of 56.0. Not much of a surprise.

Today begins a two-day Fed meeting, with the arrival of the Fed’s Rate Decision and Policy Statement at 2:15 tomorrow. We believe the Fed will move to a paused position, and hold the Fed Funds Rate at 2%. What will be most interesting is the carefully crafted wording of the Policy Statement, and if it should indicate signs of a hike during August. A hike during August would mean the quickest turn from cutting to hiking since March of 1988.

Technically, Bonds are in trading in the middle of a wide range, with a tough overhead ceiling at $100.46 and a floor of support at $99.47. For now, we can Cautiously Float as we watch Bonds improve this morning.