The Day Ahead: Moderate Economic Data, Fiscal Cliff Headline Potential

In several ways, Thursday will be the first day of the week as far as financial markets are concerned.  Even though markets were open all day on Wednesday and for a half day on Monday, there was a marked, eerie silence as the only important voice not only wasn't speaking, but wasn't even near a microphone. 

That "one voice" is a blanket reference to whichever political figure is the next to offer some substantive update on the state of the Fiscal Cliff negotiations heading into the end of the year.  It's not that such an update is really that important, simply that it's the issue du jour to which markets have staked their collective future--however immediate that may be.

Similar issues have included various European dramas, Fed policy statements, and even previous debt-ceiling debates tangentially intertwined with the Fiscal Cliff.  None of these events--the kind that are hyped as a big deal ahead of time--have proven to merit the level of hype they receive, but they "hold up the game" nonetheless.  It's as if there's an imaginary court that rules on market sentiment and someone called a shocking, surprise witness to the stand.  Whether or not the witness has any real bombshells to drop remains to be seen, but the anticipatory hush that falls over the courtroom serves to magnify the group reaction in the short term at the very least.

We've seen this play out time and again over recent weeks, but the jurors have ultimately kept their composure.  In other words, markets are clearly focused on Fiscal Cliff headlines, and are clearly willing to make concerted movements following what seem like the more important ones, but throughout the process, the 10yr yield benchmark for broader bond markets has held inside 1.85, very much in line with previous highs in August, September, and October.  MBS have gone no lower than their previous post-QE3 lows from October 25th.

This isn't to say that the Fiscal Cliff is meaningless and incapable of inciting a break past recently supportive levels for bond markets.  That's entirely possible, in fact.  The point is that it's been a frustratingly all-consuming issue regardless of its ultimate market-moving prowess.

In that regard, Thursday is indeed the first day of the week as it's the first day where politicians will be back in action, potentially churning out last-minute Cliff-related headlines.  If these add up to increased hopes that a deal is achievable before the end of the year, equities markets would likely react favorably, to the detriment of bond markets.  Anything less seems to have already been priced in to the market for the most part.

In addition to the Cliffy headlines potential, there's also the first real economic data of the week with Jobless Claims, Consumer Confidence, and New Home Sales.  None of these are likely to set the tone for the day, but they could contribute to the tone in the morning, especially if aligned in their suggestions about economic strength or weakness.  There's also the second to last round of Fed Twist buying for the year with 6-8yr maturities concluding at 11:00am Eastern.  All things being equal, 11:00am or thereabouts has been the high point of the day for bond markets more often than not when the Fed is buying.  However, all things likely won't be equal if Washington has anything to say.