The Week Ahead: Light on Data, Leaving Election in Focus

The week ahead offers an uncommonly light selection of economic reports as well as the 3/10/30yr round of Treasury Auctions.  And of course, Tuesday is election day.  The frustrating thing about considering that this week's focus could be the presidential election is that the outcome doesn't necessarily have a logical implication for bond market movement.  For those willing to read more into the election's effect on markets than us, it could be argued that it was already having an effect on Friday.  The theory would go something like this:

• Bullish NFP numbers increased probability of Obama victory
• Anecdotally, there seems to be some herd mentality that a Romney win would be better for "risk-on" stuff like higher stock prices and bond yields
• Bond markets sold off at first (because that's what they do when NFP beats the consensus), but ended up rallying as stocks ultimately sold off, ostensibly "pouting" as their horse looked less likely to win the race
• MBS outperformed Treasuries into the rally/bounce as an Obama Administration is more-than-anecdotally seen to be more MBS friendly than a Romney Administration.

Please note that all of the above is purely a hypothetical scenario and not at all something to which we've given much thought or that we'd be likely to believe unless Tuesday's election results turn all the same cogs in all the same ways.  In other words, we'll see what happens as the results take shape.  If Romney wins, then bond markets would need to be selling off, MBS underperforming, and Stocks rallying in order to begin to confirm the hypothetical scenario.  An Obama win would likely produce a more muted response.

Either way, it's the presence of these sorts of hypothetical scenarios and the perceived closeness of the race that seem to have markets waiting for something.  We must warn you, and we must emphasize that we have no idea whether or not this is the driving force behind recent market movements.  We think that may well be the case for many market participants, with simple indecision as to what's important creating the simple appearance of indecision in markets.