Rates Rally After NFP. Profit Taking Contains Continued Progress

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AFTER THE EMPLOYMENT SITUATION REPORT: Stock futures sold, the dollar declined vs. a basket of currencies, oil prices plummeted, gold looks great, and rates rallied.

The falling equity knife has found a sticking point near the low side of the recent range.  S&P futures are currently -10.50 at 1113 (1113 is the 200DMA in futures). Expect this level to be tested again today.  Consumer discretionaries (-1.24%), Energy shares (1.23%), and Industrials (-1.09%) lead the way lower.  Financials aren't much better at -1.00%.

10s shot the gap as the data flashed, dipping 7bps instantly, and the 2-year note fell to a new record low yield of 0.501%.  The 3.50 coupon bearing 10-year TSY note is +0-15 at 105-17 yielding 2.847%. (-5.4bps).  2s/10s are 4bps flatter at 233bps.

Looking at benchmark 10yr notes from a big picture perspective, long term trend channel resistance was broken after NFP. 10s are now testing the 23% retracement of record low yields.  We've priced in plenty of weakness and the opportunity cost of investing in benchmark TSYs rises with every bp decline in yield. This implies profit takers will look to fade moves through 2.85%. If 2.85% is broken and positive progress is confirmed, we may see a move toward 2.79%.

Rate sheet influential MBS prices rallied and yield spreads moved wider at 830. The August FNCL 4.5 set yet another record price: 104-25. The current coupon is 1.6bps lower at 3.675%. Up in coupon is recovering after getting smashed by opportunistic profit taking yesterday. Vols continue to deflate.

In terms of the coupons that affect your pricing, the September FNCL 4.0 is +0-05 at 102-06 and the September FNCL 4.5 is +0-03 at 104-13. Loan pricing should be improved, especially when you consider how flat it was yesterday.

I cannot emphasize this enough...

It is a Friday. It is a summer Friday. It is a summer Friday in August, the slowest month of the year on the street.  With that in mind, I would expect to see profit taking in Treasuries before yields move any lower. In stocks I am watching for a fresh round of short selling that eventually takes S&Ps through 200 day moving average support. 1105 is next key inflection point. 1120 serves as overhead resistance.