The Day Ahead: Waiting on NFP, But Sensitive To Unexpected Headlines

In yesterday's morning post, we noted that the ADP data would have to confirm further bearishness in order for Tuesday's lows to get a test of weaker pivot points than those seen on Tuesday.  In other words, the range boundary, as we saw it, was resting right on the worst levels from Tuesday, leaving a range of 2.15-2.29 in 10yr yields and 102-05 to 103-02 for Fannie 3.5 MBS.  Revisit that post HERE if you like, as we're using the same charts today, simply updated with yesterday's trading levels.  

MBS effectively revisited the center of the short term range....

Even better technical behavior here in 10's...

The chart above is a good example of why we continue to rely on 10's over MBS in assessing potentially shifting trends during periods of increased volatility.  They're better behaved from a technical standpoint, largely due to their absence of risk.  Whereas MBS have to adjust for prepayment speeds and even have to forecast consumer behavior in order to arrive at some of the more subjective components of their valuation, a 10yr yield is always a 10yr yield.  It's the benchmark.  

But no matter which chart you prefer, each of our two key players made it back to roughly the middle of what we see as the short term range.  We'll be honest...  Today feels unnecessary.  There's a holiday-shortened Friday around the corner, and it contains the only item that's keeping traders awake and present (Non-Farm Payrolls).  It's that NFP print that SHOULD ultimately determine whether or not we're legitimately testing a break out of one end of the short term range or another.  We'll talk more about that later today and tomorrow morning, but in the meantime, what do we do with today?

The only thing we can really think of is to watch headlines for something nutty out of Europe, or perhaps perk up a bit if Jobless Claims are particularly nutty at 8:30am.  Even then, we doubt many would care.  The looming shadow of NFP simply envelopes anything we see on today's schedule of activity, which is why it would take something unscheduled to change the outlook.  We're also not opposed to the fact that we could be wrong about the range boundaries and markets might push a bit to one side or another.  If things weaken, 2.40% in 10yr yields is always there as the cliche support level.  On the stronger side, 2.06 to 2.09 is the next most aggressive band of yields after the 2.15 range boundary.  

All these "what ifs" are rather pointless.  NFP is coming on Friday and it has the potential to move markets.  We're encouraged by the show of support at Tuesday's weakest levels more so than we're intimidated by resistance at Wednesday's stronger levels.  Thus, we lean toward support, but would have no qualms about quickly abandoning that bullish leaning in the face of a big NFP beat.  Just like ADP, an "as-expected" NFP wouldn't have the juice to push 10's over 2.40 and depending on where today's tradeflows leave us, maybe not even 2.29%.