Morning Report: John Williams confirms QE could end this year

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	Last	Change	Percent
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LIBOR	0.273	-0.002	-0.73%
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Markets are higher on no real news. We will get an important manufacturing report at 10:00 am est with the ISM Manufacturing Report. Bonds and MBS are down small.

Lots of data this week, with the ISM Manufacturing Survey later this morning, Unit labor costs and productivity on Wed and the jobs report on Friday. The jobs report will obviously be the biggest report of the week. The Street is expecting an increase of 177 jobs and a 7.5% unemployment rate. 177,000 jobs is on the low side of recent history. 

Federal Reserve Bank of San Francisco President John Williams confirmed the conventional wisdom in the bond market - that the Fed may start reducing asset purchases with an eye towards ending QE by year end. "With continued good signs on jobs and confidence in a substantial improvement, I could see as early as this summer, some adjustment, maybe modest adjustment downward in our bond purchase program." The program is doing this great job of helping the economy gain momentum and I would want to see that continue well into the second half of the year, but if things, again iff they go well, you could imagine ending the program by the end of the year."

The sell-off in bonds has been painful for PIMCO: Bill Gross's Total Return Fund lost 2.2% last month.

If the Fed ends QE, how high can we expect 10 year yields to go? Actually, a lot higher. The following chart shows the difference between the 10 year bond and the Fed Funds rate since it was set at 25 basis points in early 2009. Since we know the Fed is probably going to wait until unemployment gets closer to 6% before making any moves with the Fed Funds rate, we can assume that stays constant for the near term. But this chart shows we have gotten used to a flat yield curve over the past year. And that may be about to change.

Chart: 10 year bond yield minus the Fed Funds Rate