The Day Ahead: Not Much of a Day Without Nonfarm Payrolls

Yesterday

- Somehow bonds managed both a big rally and range-bound containment at the same time

- Weak ISM Non-Manufacturing data was the star of the show, but rally faded after noon

- 12:30pm-5pm trading patterns convey lots of uncertainty this week

- Some of the mid-day weakness was attributed to a NY Times story re: Boehner preventing debt ceiling default

- Rate sheets miraculously unchanged again (slight positivity perhaps, but some lenders were worse)

Today

- THERE WILL BE NO NON-FARM PAYROLLS

- Several Fed Speakers throughout the day, concentrated in the morning hours

- Shutdown headlines would only be good for a small, unsatisfying, wild goose chase in bond markets

- Everything truly interesting about the shutdown was learned yesterday when NFP was officially postponed

Strategy

Yesterday was very telling in 2 important ways.  First of all, it confirmed that no one knows what the heck they're going to do until they get their hands on some data.  Even after a weak ADP on Wednesday and a weak ISM Services report yesterday, and even after bond markets rallied on those reports, trading levels still managed to return close to previous levels.  Moral of the story: "we see you, data, and we understand what you're saying, but we're more interested in something else."

That "something else" is the other way that yesterday was telling, in that it was undeniably confirmed to be that which we've suspected from the start: nonfarm payrolls.  The proof came when the Labor Department FINALLY, officially announced that the monthly Employment Situation Report would not be released today.  Before that, both stocks and bonds had leveled off relatively calmly following the ISM data, but both picked up in volume and 'flight-to-safety' movement (bond yields and stock prices move down) immediately after that.  This was the icing on a cake that the US Economics team at Bank of America Merrill Lynch described thusly:

"The ongoing government shutdown has disrupted the normal data flow. We, along with the markets and the Fed, are flying blind when it comes to tracking the economy. Most importantly, the September payroll report will not be released on Friday, October 4 — and we won’t know when it will be released until the shutdown ends. Meanwhile, the longer the shutdown drags on, the less we will know. The majority of indicators that would have been released in the next few weeks feed directly into our GDP tracking model, which we won’t be able to update until the shutdown ends."

This sense of 'flying blind,' is what we've been discussing all week.  It's not an avant garde concept among market participants but the inescapable vortex of shutdown headlines threatened to drown it out.  The absence of NFP indeed renders today rather pointless, and any meaningful movement in bond markets will have to be adapted to on the fly, or completely disregarded if it at all possible.  That's a fancy way of saying we wouldn't read too much into movement today unless it's very big and obviously connected to something we didn't see coming.

Charts

Treasury Consolidation

Shows the circling of the wagons longer term in that 10yr yields have consolidated and gone sideways around 2.61, albeit with a moderately positive tilt.  That 'tilt' is a good approximation for the uncertainty premium from the shutdown, benefiting bond markets and hurting stocks.

MBS Afternoons

On a more micro level, MBS tell a story of utter uncertainty, essentially shutting down at lunchtime every day in October so far.  The vertical yellow lines are 12:30pm on each day.  Note the ensuing sideways range-trade/consolidations on each afternoon with any meaningful movement on the day obviously taking place in the AM hours.  This doesn't mean that traders are going home at lunchtime, simply that the activity is concentrated during the times of the day where liquidity can be assured, and they're playing it safe during times of day where it can't.