Yesterday the FOMC announced the end of QE3 (November) stating that the underutilization in the labor market is gradually diminishing and that the Fed will likely maintain the 0-1/4% target Fed Funds Rate for a considerable time. They recognized that inflation continues to run below their long-run goals and that recovery in the housing sector remains slow, but believe that the overall economic trend is improving. With the timing of rate hikes being largely data dependent, and the modestly hawkish statement released yesterday, we anticipate less Fed dependent pricing in the long end of the curve and the introduction of an element of volatility that has been suppressed in recent years as hedge conscious buyers enter the MBS purchase space. GDP increased at an annual rate of +3.5% in the third quarter of 2014, following a +4.6% GDP print in the second quarter. The increase in real GDP in the third quarter can be attributed to positive contributions from personal consumption expenditures (+1.8%), exports (+7.8%), non-residential fixed investment (+5.5%), federal government spending (+10.0%), and state and local government spending (+1.3%). Initial Jobless Claims rose to 287K vs. 283K prior (consensus 285K) and Continuing Claims rose to 2384K vs. 2351K prior (consensus 2352K). Although claims increased last week, the monthly trend is still at 14 year lows, a sign that the labor market is strengthening. The curve has bull flattened with 2s10s down -2.8 bps and MBS is underperforming treasuryhedges by 1.5-2 ticks.
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