The Day Ahead: ADP Employment Called in to Work; NFP May be Furloughed

Yesterday

- First Government Shutdown since 1996, No traction on resolution so far

- Bond markets were most volatile overnight and into early morning

- Data had little effect, technical trading patterns dominated.  Treasuries traded "robotically" (chart below)

- Fannie 3.5 MBS lost 13 ticks, ending at 101-16, but favored 101-20 as support for most of the day.

- 10yr yields found support at 2.65% after opening at 2.66%, Mortgage rates were steady to slightly higher.

Today

- Surprise!  ADP may be THE employment report this week (Friday's NFP may be furloughed)

- Bond market momentum has been decelerating.  Strong ADP may confirm turn. 

- ADP would have to be quite weak in order to "undo" the waning positive momentum (chart below)

Strategy

Weeks that contain the Employment Situation Report (NFP) are supposed to be all about NFP.  Yet here we are in the midst of a government shutdown that currently looks likely to postpone September jobs numbers that would have otherwise been reported on Friday.

The Wednesdays of NFP weeks are historically no slouches, if for no other reason than their customary ADP Employment Report numbers.  After ADP changed their methodology in late 2012, the report has been even more accurately predictive of the "private payrolls" component of NFP. 

Today's ADP, however, takes on much more importance than normal as it may be all we see this week in terms of September's payrolls tally.  Bond markets have been showing signs of fatigue in their rally for several days and it wouldn't take much of a beat in the data to confirm a bearish corner turned.  Remember that a certain amount of defense has to be played against the next FOMC Announcement at the end of the month. 

10yr yields have edged a bit below the 2.75 well of gravity between "to taper or not to taper," but should be willing to hustle quickly back to that neutral territory if greeted with stronger employment data.  Throw in a debt-ceiling resolution later this month (because even stupidity has its limits) and the economic data is free(r) to shape expectations for an evolved FOMC Statement.   Of course these balls can bounce bearishly too, but improvement can't help but feel more limited when we're already a decent ways into enemy territory courtesy of the September rally.

Charts

MBS and Treasury charts that speak to the robotic trading patterns witness on Tuesday.  During CME hours, trading looked nigh on preordained, rather than born of any sentient reaction to market events.  Interested in an English version of that last sentence?  "Black box trading was more influential than human reactions to the day's events."

Longer term Treasury chart

Most of the mark-up is on the chart itself, but there are two things going on here.  First is the simple overlay of a 5-day moving average up top.  This is no gospel, but the last 4 times 10yr yields broke and closed through the 5-day avg, momentum followed in the direction of the break.  The yellow circle shows that this doesn't always happen.  Even if it does happen, it doesn't indicate an extended sell-off necessarily. 

The lower section of the chart speaks a bit more to the longer term.  This is the MACD Histogram, a basic momentum indicator.  The fact that the histogram is still "in the green" means that there's still technically positive momentum remaining, but the fact that the bars are shrinking mean that the positive momentum has been retreating.  Oftentimes this is the first warning sign in a more prolonged bounce.  Of course such a bounce would be data-dependent, but the point is that underlying technicals (these technicals anyway), leave the door open for such weakness if the data is strong.