Friday Rout...

Everything is getting killed today after both Poole and Fisher didn't seem too keen on cutting rates. Less reported here in the states is Trichet's hawkish tone today. European bonds were performing about as bad as the U.S. Let's look at what the bond market is telling us.

• The curve is about 2bps steeper
• Swaps are 1.5bps wider
• High-grade corps are 1-2 wider
• MBS spreads wider

You'd be tempted to say that corporate spread widening is a credit issue, particularly with all the negative news surrounding banks and stocks off so severely. But given than corps are in line with swaps, it isn't really a credit thing. I think the market is pricing in more volatility. That is the one thing that fits all four of the above points.

And we could all agree that the outlook for Fed activity is less certain now than 2-3 months ago. Back in November the market was more confident that there was 1-3 cuts coming in 2007 and the debate was more about how many and how soon the cuts would come. A hike sometime in the near term is now in play. Don't believe me? Take a look at the Funds Futures data from the Cleveland Fed. Even before today, the odds of a hike at the June meeting were greater than a cut.

And yet we are hearing more dire news about the state of sub-prime lending. What will the impact of large scale mortgage defaults be? Will it exacerbate already weak housing prices as foreclosure related sales add to supply? Could further declines in home prices push the economy into recession?

While my own answer to the above is "no," we cannot ignore that all this is adding to uncertainty.