MBS CLOSE: Explaining the Expected Distortion in Employment Data

"Rate sheet influential" MBS coupons ended the day near the price highs of the week.  While we did see spotty reprices for the better this afternoon, the majority of lenders left rebate unchanged on the day.

The FN 4.0 went out +0-09 at 98-20 yielding 4.134% while the FN 4.5 ended the session +0-07 at 101-13 yielding 4.344%. The secondary market current coupon fell 3.6 basis points to 4.26%. "Rate sheet influential" MBS coupons benefited from a down in coupon bias today. The FN 4.5 outperformed benchmark Treasury hedges by a few basis points. The current coupon yield is 65.4 basis points over the 10 year TSY note yield and 62.4bps over the 10yr swap.

The FN 4.5 broke range resistance and is currently bid just below its intraday high of 101-15+.

Heck, the FN 4.5 is only 3 ticks under the 2010 high price print of 101-16...

I can paint a similar picture for benchmark Treasuries.  The 3.625% coupon bearing 10 year TSY note was +0-04 at 100-05 yielding 3.606% when the clock read 5pm and the market unplugged. 10s were bid near their most aggressive levels of the week when the day was declared done.

This is only a few basis points above the 3.57% pivot point, but still a ways away from 2010 yield low of 3.52%.

The long end of the yield curve---aka the "rate sheet influential" benchmark side---had a great day, but the short end got tore a new one. The 2 year note yield was 6bps higher after bouncing violently off of 0.80% resistance.

This was good for a 6 basis point 2s/10s yield curve flattener...interestingly enough, this occurred right at the 280bp pivot point we discussed in the most recent MBS WEEKLY. The curve got SMASHED today!

At this point, with the charts above in mind and benchmark yields testing long standing range resistance before what is expected to be an atrocious, winter weather distorted Employment Situation report tomorrow....you might be thinking today's (this week's) rally was a FLIGHT TO QUALITY induced move.

It would make sense that the market might be hesitant ahead of such a big econ release. Well...throwing a wrench in the "FLIGHT TO QUALITY" explanation was another uptick in stock indexes today. The S&P closed up 0.37% at 1122, just off the highs of the day. The S&P has now fully recovered all losses incurred in 2010 and is now positive on the year.

I am not going even going to attempt to tie fundamentals to today's price action. If I did we would be discussing Fed Funds rate speculative posturing and knee jerk reactions to money market tape bombs all night..and none of it would be confirmed. If you are interested, I think THIS STORY ABOUT FANNIE MAE will shed some light on weakness in the front end of the curve. The plain truth is that the volatility was way down today and most market participants were happy with current positions before NFP tomorrow...anyone who wasn't got stuck trying to maneuver in a thinly attended marketplace. Look at 10s...after some morning chopatility...it was a slow grind to the right for the rest of the day. Yawn.

WHAT DOES THIS MEAN FOR TOMORROW?

Nothing really, for the most part rates have chopped around a contained range all week before ending up right we left off last Friday (see 10s chart above). A weak jobs report appears to be baked in already.

I know everyone wants to run through "what if" scenarios and try and position their pipeline for profits ahead of tomorrow's NFP print....I cant say I blame you...the EMPLOYMENT REPORT is a major market mover and can create a lot of opportunity for your float.  Basically, after a whole bunch of back and forth debate on the impact of the winter weather on the February jobs data...the market seems to have already written it off.  Unless the data is way outside the already wide range of estimates...the market will continue on with its business and wait for a clearer read down the road.

If you haven't read or heard anything about the SNOW DISCOUNT being priced into NFP data, here is a quick recap.

Two major snow storms hit highly populated metro areas on the east coast  on the weekend of February 6 and then again on February 9. This was the week the official Establishment Survey was conducted by the Bureau of Labor Statistics. At that time, everything in DC, MD and Eastern PA was under a five feet of snow.....schools and businesses were closed as folks were unable to leave their homes. 

Because the official Establishment Survey (not the household survey which is where we get the UE rate)  was conducted during this week, the nonfarm payrolls side of the survey is expected to be affected adversely....meaning when the BLS came calling and businesses did not answer... it automatically reduced the payroll count. 

This is especially relevant for the largest source of employment: SMALL BUSINESSES. The other side of the release, the Household Survey, was conducted one week later this month....so it is expected that the unemployment rate may provide a better gauge of the labor market in February.

This should help too:

What is the BLS's definition of employment?

Employment is the total number of persons on establishment payrolls employed full or part time who received pay for any part of the pay period that includes the 12th day of the month. Temporary and intermittent employees are included, as are any employees who are on paid sick leave, on paid holiday, or who work during only part of the specified pay period. A striking employee who only works a small portion of the survey period, and is paid, would be included as employed under the CES definitions. Persons on the payroll of more than one establishment are counted in each establishment. Data exclude proprietors, self-employed, unpaid family or volunteer workers, farm workers, and domestic workers. Persons on layoff the entire pay period, on leave without pay, on strike for the entire period, or who have not yet reported for work are not counted as employed.

Does that make sense? If people don't show up for work are not counted as employed. If you're snowed in and can't show up for work...ARE YOU REALLY NOT EMPLOYED or just stuck in your house? Less employed people negatively affects the payrolls count. Here is an example of how the BLS release might read: "Nonfarm payroll employment declined by 150,000 in February".  If 100,000 of that payroll count decline was a factor of people being unable to show up for work...it doesn't mean 100,000 jobs were lost...it means 100,000 people couldn't show up for work. The way this data is compiled and communicated can be really misleading at time.

I hope this helps. 

Reuters consensus calls for 50,000 jobs losses. Whisper numbers are for up to 200,000 "job losses" . The unemployment rate is expected to rise from 9.7% to  9.8%.

Plain and Simple: I think the bond market shrugs off weak data and freaks out if it is better than expected.