MBS CLOSE: 3 Days Later, Back To The Start
Narrowing Ranges... That's been a bit of a theme leading up to NFP. The end of December through Tuesday was a pretty good run in which the 4.5 made it from the mid 99's all the way to trade in the mid 100's for more than just a split second.
Similarly, tsy's dropped 10bps from around 3.85 to 3.75. But in the last 2 days, we've unwound almost half of those gains. Tsy's are a bit weaker as 3.826, today's closing yield, is right in the thick of the high yields that have been flirting with 3.85 closes. It's all very reminiscent... Range trade ahead of significant data... Narrowing into the event itself... Prepared to break the range should data provide enough of a suggestion.
In the above charts, the circles (as always) highlight some of the pokes that prices and yields have taken at their pivot points, at least based on an hourly view of the data... There are more pivot points to consider were we to zoom in to a tick by tick or minute by minute few. But the minutia of the numbers don't matter as much as the broader phenomenon of HEADING BACK TOWARDS PREVIOUS TRADING LEVELS. Aka: narrowing range...
I get the sense beyond what I've read and heard, that the market is poised for a plus sign to be in front of the NFP number tomorrow. I started to wonder over the past few days if that could even be a reason for an extra nasty pre-data weakness in the bond market--a weakness that hit in the fog of december's seasonal uncertainty. Whether any of the weakness to date is a defensive play against the risk that a positive handle on NFP could create a snowball of perception, and kill bonds in the process, doesn't matter much now though... Much more important is simply waiting for the thing itself!
If the number is indeed positive, and things get ugly, we'll know that even at the 3.8's in 10yrs levels, that the market didn't bake in every last bit of concern. Likewise, we'll know that if bonds hold steady or gain moderately in the face of booming stocks, that a pretty defensive position was carried into NFP. Whatever the case, AFTER the release is the only time to sort all that out, and given that it happens before most of us get our rate sheets for the day, floating into tomorrow, to me, equates to a "black or red" bet on the roulette wheel. (I'm just hoping it's not like the coin-flip game AQ always plays with me when he sees I have cash... I think it's called "heads I win, tails you lose.")
There's some logic that could sway your perception one direction or the other, however. On one hand, there's all that "recovery stuff." You know.... The economy is adding jobs, etc...
On the other hand, there's the notion that exhaustion of benefits mitigating jobless claims, holiday season's effects from temporary hiring, Fed's continued insistence on ongoing slack in labor market, weakness in services sector side of recent econ data, and much more... But even within the data used to support certain ideas about NFP, there can be a whole subset of other points and counterpoints, such as determining how correlative Claims are to NFP, etc... Point is: you're welcome to make lock/float decisions based on where you think things will end up, but don't run your numbers with a better than 50/50 shot at being right. I don't.
I'll leave you with NFP vs. ADP. I don't think I've been shy about my lack of belief in ADP's predictive value. Sometimes it happens, sometimes it doesn't. The long term chart shows, as it should, a high degree of long term correlation, but focus on the month to month changes in the two in order to determine how likely you think the correlation will be tomorrow.
NFP in grey, ADP in blue