Trading Today - FOMC Aftermath ... Claims, GDP, 7-Year Auction
The morning's data calendar in the U.S. will be dominated by the Q3 GDP and Jobless Claims releases due out just after the open. We expect the GDP release will take center stage. Once through the data, dealers will need to position ahead of the afternoon's 7-year note auction.
The 7-Year Note Auction Preview ... Stats, Facts & Observations
The $29.0 billion 7-year note auction on Thursday afternoon will complete this week's package of Treasury coupon auctions. The 7-year note auction sizes have been steady at $29.0 billion since July 2010. The auction will raise all new cash when this week's month-end coupon auctions settle on Friday.
FOMC Statement from Oct. 28-29: Keeps ''Considerable Time''
1. The FOMC retained the 'considerable time' language for its forward guidance, but overall more hawkish in tone regarding labor market and economy.
2. 'Underutilization of labor resources is gradually diminishing'.
3. 'Inflation in the near term will likely be held down by lower energy prices and other factors'.
4. Asset purchases cut by $15 billion; program ends in November.
5. 9-1 vote suggested shift to more moderate center in FOMC sentiment regarding policy outlook.
Mortgage Focus: Don't Expect the Credit Floodgates to Open
--FHFA last week announced additional changes to the GSEs' reps and warrants framework designed to further reduce lender concerns about putback risk.
--The changes should produce some increase in lending, but we don't look for the credit floodgates to open.
--The GSEs are buying more loans from smaller banks and nonbank lenders. It's not clear how that trend might be affected by the new reps and warrants framework, but we doubt it will be reversed.
--Putback risk isn't the only factor constraining lending, although it's been a major one. New regulatory requirements are also impacting the flow of credit.
--The GSEs will also issue new guidelines on low down-payment loans in the weeks ahead. The GSEs currently back loans with low down payments, although they charge a large fee for doing so.
Fixed Income Focus: A Corrective Mood ... Month-End Supply Preview
Treasury yields churned a little higher this past week, led by the belly of the curve. Much of the price action was just a slow correction to the blowout rally through the middle of the prior week.
Treasury will come to market during the upcoming week with a $93.0 billion package of month-end 2-year, 5-year, and 7-year notes. They will hold a $29.0 billion 2-year note auction on Tuesday afternoon, a $35.0 billion 5-year note auction on Wednesday afternoon, and a $29.0 billion 7-year note auction on Thursday afternoon. In addition to the implications of the mixed demand at the mid-month auctions this month, the 2-year and 5-year note auctions will be made more difficult by the proximity of Wednesday afternoon's FOMC decision.
Fixed Income Focus