MBS CLOSE: Muted Markets Presage FOMC Wednesday

By: Matthew Graham •

 

  • MBS and Tsy's lose moderately, opposite for stocks (MBS down 8 to 101-31, 10yr Yield at 3.422 from 3.38, S&P at 1042 from 1036.
  • Pending Home Sales rise for 8th straight month
  • Tuesday"s Data: Factory Orders, Unit Vehicle Sales, Fed Goes In
  • Focus on Wednesday's Key Event: Fed Comes Out (and talks about monetary policy or something like that...)

To revisit topics discussed in the MBS Afternoon Commentary, actions and reactions were muted today on both sides of the market.  Taken at face value, or more appropriately, in a vacuum of impending data where there is no FOMC announcement on Wednesday, this AM's data combined with other headlines, such as Ford earnings far exceeding expectations, should have served to cause a bit more upside in Stocks and and bit more Downside in Bonds.  As it stands, we ARE NOT in fact operating in said vacuum and the very real, very anticipated FOMC announcment has both teams huddled a bit more closely than normal to center field in preparation for a game that can rapidly shift to one side or the other.  Shoes will continue drop.  Falling knives will avoid capture for another day, and the anticipation for the REAL mover of rates will continue to grow while the rates themselves can offer precious little indication of their own volition.

Both MBS and Tsy charts above show prices and yields moving towards the middle of their two day ranges.  We've seen this "honing in" movement not only hearken the end of the day during periods of range trading, but especially so as markets gear up for important data, hence the "moving to center-field" analogy above.  On the other side of the coin, stocks also feel short of their organic rally potential considering the data...

To make matters perhaps slightly worse for the S&P, the red line, which represents the well established trend of higher lows from August, DID NOT come into by the end of the day.  And the longer term trend from July's lows is as good as dead for the moment.  Instead the index seems to have been clued in to the 1042.89 level that stood as support twice in September and once again last week when it coincided with the bounce off the red line.  Holding under that level through the FOMC minutes would likely be good for bonds, but the next major "crystal ball" moment for the S&P won't come until August's highs are broken and even then, more importance would likely be reserved for  the next 5 point drop to early october's lows before things get really speculative around a "g." 

Ranges and techs were in play as per usual in bonds as well...  But on the long term charts, MBS and Tsy's seem to be set up in slightly different positions.  After all was said and done today, MBS look to be working with the 100-28 "safety" net provided by the repeated technical significance of the 100-28 level combined with the 100-31 closing price.  In other words, after a few choppy sessions, MBS are trading somewhat better than long term support.


Tsy's on the other hand look to have a little tougher road between them and lower yields.  The next signficant long term support doesn't arrive until rates back up to 3.5, with a few different markings around 3.48 to 3.49 also having been recorded in recent weeks.  But resistance abounds, first with the whit line at 3.415, then "old faithful" 3.38 lurking just below, followed shortly by 3.34.  Indeed additional levels could be argued around 3.31 and 3.27, but let's take one potential future rally at a time, shall we?

As you know, we also like to lean on Tsy Futures from time to time as a more sober and very well behaved (in terms of technical price levels) companion to MBS and Tsy markets.  They have the added benefit of trading in price, just like our beloved MBS. 

This chart is the 2nd vote for door A and the third vote for door C.  Let me explain...  If we suppose door A was something like "generally more positive fixed income trading," then the fact that futures broke over 118-16 last session an just squeaked in their closing levels above there today, would be one day of confirmation out of the way for the trend shift.  Combine that with MBS's similar altitude with respect to it's technical level at 100-28 and things begin to look good; two out of three votes good. 

If we suppose "door B" is something like "bad news for bonds," then cash market tsy's inability to get back to late October low yields could be construed as the sole vote for that.  But in a cruel twist of fate, ALL THREE markets vote for door C, which is the "Despite ostensibly technical significance, there isn't much incremental benefit to be gleaned from such inactive charts today considering the FOMC minutes on the horizon and the low volume" door.  So, um, yeah...  I'm basically saying that's our door...  Anticlimactic, but hopefully logical...

If the logic holds, tomorrow holds a high liklihood of more of the same.  It's probably the weakest data day on this week's calendar, not to mention that trader's thoughts will be leaving early from Tuesday's party in order to get a good seat for the Bernanke show at 2:15 on Wednesday.  Extended metaphor reiterate the relative unimportance of almost anything tomorrow in favor of the FOMC juxtaposition.  Still, for those who must know what tomorrow holds:

  • Factory Orders (Sep) at 10:00 
    • expected higher by 0.8%, reversing August"s decline.
  • Unit Vehicle Sales (Oct) throughout the day. 
  • FOMC begins its two- day meeting at noon.