The Day Ahead: Last Chance for Normalcy this Week

With the coming and going of the confidence vote for Italy's new Prime Minister Enrico Letta on Monday, and the absence of a discernible reaction in US Bond Markets, it's unlikely that the 2nd round of confidence voting today will have much of an impact.  In fact, considering that such things DID have an impact in European markets, we might go so far as to say that US bond markets are rather uninterested in any of the week's European offerings outside Thursday's ECB Announcement.  

Whereas Monday's events were of little concern to thinly traded, narrow ranged MBS and Treasuries, Wednesday's events stand a good chance to have the opposite effect (to whatever extent ADP and FOMC offer surprises).  After that, Thursday is the ECB Announcement and Friday is NFP, each incrementally increasing the odds of craziness.  That leaves today as something of a "last chance" for a more normal trading day.  

Even though it could be "more normal," the data certainly isn't insignificant, though Employment Costs and Case Shiller aren't likely to motivate much movement.  Chicago PMI, on the other hand, does have a tendency to cause a pop if it's far from consensus.  Keep in mind that a portion of the trading community gets the results 3 minutes early at 9:42AM, so it's not uncommon to see a less than subtle hint as to whether or not the headline beats or misses if it's a big enough example of either.  Fifteen minutes later, April Consumer Confidence is expected to come in at 60.0 vs 59.7 previously.  From there on out, the only thing to go on will be tradeflows (volume, direction, account type...) and technicals.

Speaking of technicals, things are getting serious--well, at least as serious as they can be in the ultra-compressed trading ranges of 2012-2013.  We'll revisit the following charts in more detail depending on how they play out through the course of the week, but here's some food for thought.  

What's In This Chart?

- all SOLID lines are simple linear regressions, meaning they have an equal number of points above and below them for a given period of time.

- The GREEN line is a linear regression from the initial mega-rally (or mega-crash if you're into that whole equities market thing) in late 2008.  Rest-assured, this regression line stays similarly sloped through 2006.  Note: the past 4 months of trading above this line are distinctly different from the 3 weeks spent doing so around this time last year.  The implication is that a break back to the more bearish half of the post-2006 reality was unsustainable last year, but this year could still be different.

- The solid RED line is another linear regression from 2012 lows through present.  The dotted lines are 1.23 standard deviations from the mean.  There's nothing special about 1.23 (other than 23% being a Fibonacci retracement).  It simply happened to be the best fit to connect the highs and lows of the recent range.  10's are already definitely testing a breakout of that trend with Monday being the first full day spent on the other side, but that's still not the confirmation we're looking for (nor will today be unless volume picks up and last week's lows are taken out--mid 1.64's).  

- RED and GREEN together give us resistance from an uptrend and a downtrend.  Keep in mind that these technical lines are most informative AFTER they're broken, so if one or both of them continue to act as resistance this week, we'd have one more reason to view each of them in a "trend is the trend until it's not anymore" sort of way.

- The TEAL lines are a super long term regression going back to the early 90's.  The solid line is the regression line and the dotted lines are 1 standard deviation out.  This was included in the above chart in order to highlight the subtleties of the potential resistance bounces in late 2008, late 2011, and mid 2012.  Notice how the mid 2012 breakout returns to the deal line and hits it as a ceiling a few times.  That's one of the calling cards of a technically significant line.  Here's proof with the zoom-out (green and red lines left intact so you could see how they relate in the long-run):

- If you pay careful attention to the outer limits of the long term regression, you might notice that the long term peaks and trough breakouts are almost perfectly equidistant.  "Now™" is a significantly different trading environment vs "Then™" so there's nothing much to conclude here unless you think there's a "5 yr itch" conspiracy afoot in bond markets (on the off chance you came here looking to validate that conspiracy theory, you're welcome!).

- On a final note, this is an MBS site, so here's an MBS chart.  In a grand, strategic sense, MBS just aren't as informative as Treasuries (which is why we typically chart Treasuries and discuss variations in spread vs MBS when warranted--around QE3 for instance), but we do have a pretty good long term inflection point at 104-19.  One redeeming quality of charting MBS is that the structure of coupon system and lender rate sheets tend to result in similar PRICE technicals for whatever the "current coupon" happens to be (note: there are varying definitions of "current coupon," but in this case, it refers to the most liquid, most closely tied to best-execution on rate sheets).  As such, 104-19 has gotten play for 4.0, and 3.5 coupons as well.