Morning Report - The week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	2035.9	-10.4	-0.51%
Eurostoxx Index	3083.1	-56.4	-1.80%
Oil (WTI)	50.71	-2.0	-3.76%
LIBOR	0.256	0.000	0.00%
US Dollar Index (DXY)	91.53	0.453	0.50%
10 Year Govt Bond Yield	2.09%	-0.02%
Current Coupon Ginnie Mae TBA	105.3	0.3
Current Coupon Fannie Mae TBA	104.7	0.1
BankRate 30 Year Fixed Rate Mortgage	3.98

Markets are lower this morning as oil and the euro continue to slide. Bonds and MBS are up. 

The NY ISM came in at 70.8, a very strong number. We are also getting December vehicle sales this morning, and the generally look strong. 

This promises to be an eventful week, with the FOMC minutes on Wednesday and the jobs report on Friday. It will be interesting to see how the Fed viewed 3Q GDP at 5% - is this a temporary blip, or the beginning of a more robust recovery. Note the Fed did not change its 2015 GDP estimate, which is still in the range of 2.6% to 3.0%. I would be interested to see their internal forecast for the price of oil, but that won't be released. 

The other focus will be on the Fed's MBS portfolio: If I were the Fed, I would be very reluctant to continue to purchase MBS at these levels. While QE is officially done, the Fed is still re-investing funds from maturing MBS back into the market. With prepayment speeds picking up, it seems like the Fed has a golden opportunity to shrink its balance sheet with a minimum of disruption to the capital markets.

Chart: Federal Reserve Bank Total Assets 2006 - Present:

While the drop in oil is a good thing for the US, it does pose some risks to the financial system, as emerging market distressed debt continues to get smoked. The banking system is much better capitalized now than it was in 2008 or even the late 90s, when the Asian Tiger crisis threw the markets for a loop. This is already pushing down interest rates worldwide (the flight to quality), so keep in mind the push-pull dynamic happening with US rates - in an economic vacuum, US rates would be much higher due to the recovery, but international worries and relative value trades are pulling them lower. One possible dark cloud - during the Asian Tiger Crisis, the Fed cut rates help ease the pain in the financial system. They don't have that option this time.