The Day Ahead: Markets Waiting to be Inspired

Yesterday

- 2nd day of government shutdown and markets didn't much care

- Weak ADP employment helped facilitate early gains, but uncertainty took over and rally stalled

- Uncertainty: ADP weakness wasn't resounding, Still don't know if we'll see NFP this week

- Fannie 3.5 gained 9 ticks to end at 101-25.  10's dropped roughly 3bps

- Despite MBS gains, rates sheets were relatively unchanged

Today

- Jobless Claims will report as normal.  ISM Non-Manufacturing too!

- Another day, another chance to watch shutdown headlines.  Hurray

- Shutdown headlines are most relevant because of implication on NFP

- Markets still most interested in NFP; Don't believe anyone who tells you Fed doesn't matter

Strategy

At least a few pundits yesterday said directly or alluded to the notion--in not so many words--that the Fed didn't matter as much this week because of the shutdown and upcoming debt-ceiling battle royale.  Nothing could be further from the truth.  First rule of interest rates: the Fed always matters as much as they want to--most of the time way more.  in fact, the only reason the Government shutdown matters is that it has gotten in the way of that which markets most desired to see: Friday's jobs report (which may no longer be on Friday, of course).

The fact that markets reacted as much as they did to yesterday's fairly modest miss in ADP (166k vs 180k forecast), and all the very constrained, mechanical trading surrounding that data would suggest we continue to wait for something.  That something is NFP.  The problem is that we don't know if it can even still happen on Friday because there's no explicit statement saying 'NFP absolutely will not happen,' simply that it won't report if the government is shut down.  So if the shutdown ends today, will we see NFP tomorrow?  Next week?  At all? 

Jobless Claims will report as normal, and the report was never in question.  Same goes for ISM Non-Manufacturing at 10am which is also a relevant market-mover.  We can learn more about the extent to which markets yearn for data based on the reaction to these, if they're very far from forecasts.  Otherwise, we're very much stuck in a rut, albeit one that's neither good or bad for bond markets or rates at the moment (see charts below)

Charts

MBS and Treasury charts showing the narrow, mostly sideways ranges that have persisted for the past 4 sessions: