Yesterday, when we talked about the likelihood of short term weakness followed by long term strength, I'm sure we were all hoping for a little less weakness than we saw today.

A little weakness wouldn't have shaken confidence to the same degree.  But we lost so much ground today that it forces us to be on our toes tomorrow.  What I am seeing from a historical and technical perspective is an MBS market that will either be heading back to the annual lows, or beginning a slow progression towards the best levels of the year.  As we've discussed, this has happened a majority of the last 10 years.  All the ingredients are in place to make this year the same, but we got thrown a bit of a curveball today, well, two curveballs really.

For quite a while, the buzz from industry insiders has been that inflation is not quite as bad as the inflation hawks are making it seem.  And for quite a while the data had continued to prove them right with tame reads, especially on the core.  Today's CPI report, though not egregiously awful, was a step in the wrong direction.  Couple that with the fact that the Fed meeting minutes were less than friendly about inflation and we had some very steep drops.  In fact it took us past a very key level on a trend we'd been riding for the past few weeks, but only just.

So the question that remains to be seen is whether or not we will continue to decline tomorrow, or if we can reverse course.  If we decline tomorrow, it puts our rebound out a bit farther (20-30 days), whereas if we gain, it would happen sooner. 

We'll be burning some midnight oil to run some more analytics for you to see if we can get a better read on the market after today's volatile action.  Let me reiterate that now is not the time to be taking risks with short term locks.  If you have something that's a few weeks out, we will probably make it back soon enough.  But if we drop appreciably tomorrow, there's no telling how soon we'd be back.  I know that many of you probably locked with the losses today, so this conversation is more for those that didn't. 

Our main challenge is to get a read on the markets in a medium term.  This is always the most difficult read to get.  We can almost always see what will happen intraday, and we can always estimate with a high degree of accuracy what will happen long term, but anything from a few days to a few weeks out represents significant challenges in data interpretation.  I don't want any floaters to get caught in a bad way here in the next few weeks.  As can be said almost any afternoon, "tomorrow will tell us more," but it is doubly true today. 

 I still really like how wide spreads are.  Granted with Fannie/Freddie Drama, illiquid capital markets, and a waning overseas bid, we could go wider still, but in general, the forces pushing the curve tighter are much greater than those leading it wider.  Furthermore, I was pleased to see just how well MBS held up today even as stocks got bought up.  We didn't lose nearly as much as treasuries into the mid-day and not nearly as much as it "felt" like we should have lost on a comparable stock-rally-day.  MBS moved back and forth with equities a bit earlier in the day, but once stocks really picked up the steam, MBS refused to back down very quickly.  That's a good indicator.

Tomorrow brings us another action packed day and marks the end of the week for scheduled data.  We'll get to see if Jobless claims can add more positivity to last week's better than expected read.  If that alone happens, it could stoke a stock rally that pushes into the weekend, but it would have to be another appreciable discrepancy.  We also get housing starts, which almost not one cares about.  Although, if this number is drastically lower than expectations, paradoxically, this might be viewed as good by some as it would help speed along the notion that inventory will be reduced more quickly.  In general though, no one cares.  The Philly Fed Survey comes at 10AM Est.  it can make big waves if it differs greatly from expectations.  On many a past Philly day, we've seen this report cause significantly more movement than warranted.  The minus 17 consensus would make this one of the higher readings this year, so draw your conclusions accordingly.  If it's of any interest to you, 4 out of 6 months so far this year, the actual number has been worse than the consensus.

The jobless claims consensus of 378 has both the bearish trait of being worse than the previous week's reading, and the bullish trait of being better than the previous month's consensus as well as a slight drop in continuing claims.  Also, the often overlooked TIPS auction will occur later in the day.  Bloomberg puts it well in terms of the TIPS auction significance: "Economists and policymakers consider the differential between yields on 20-year TIPS and regular 20-year bonds to be a proxy for investors' estimate of inflation expectations. Actually, the Treasury does not offer regular 20-year bonds, but the Fed calculates yields for 20-year constant maturity securities."  So this could add fuel to the inflation fire stoked today by the CPI, or it could allay fears.