The Day Ahead: Fiscal Headlines vs Beige Book

By: Matthew Graham

Yesterday

- Fiscal headlines dominated the action even before bond markets began trading

- Treasury futures took a hit on Monday after the first barrage of headlines

- 10yr yields ended Tuesday right in line levels suggested by Monday afternoon's futures sell-off

- Does that mean nothing in between mattered?  Yeah, probably. 

- MBS were about a quarter of a point weaker, as were prices on rate sheets

Today

- More fiscal headline potential!  Yesterday ended with word of a new Senate deal.  Could be announced today.

- NAHB Housing Market Index will report, but few will care as the data hasn't lined up well with reality

- The Fed's Beige book may actually matter! 

- Assessing and ongoing technical reversal in the Treasury recovery

Strategy

When was the last time there was any meaningful level of interest in the Fed's Beige Book?  Some economic releases, if you're not waiting for the wires, market movement will tell you something is up, prompting a check of the wires that might be hiding in that window you minimized in favor of the latest youtube gag reel of infuriating congressional incompetence.  But not so with the Beige Book!  In it's 2pm time slot, it can easily go unnoticed. 

Today's version, however, stands a better chance to get some attention considering there's just not much by way of economic data available during the shutdown, combined with the fact that bond markets are especially desperate for economic data!  Additionally, the lag time between the end of the data collection period and the Beige Book release is usually 9-12 days, meaning that today's may actually capture some of the early reaction to the shutdown.  That means that this report that's typically telling us stuff we already know from the other economic data, will today have a chance to tell us something that few other reports can--maybe.

More likely, the tenor of the day will either already be in place or the spotlight will be stolen by fiscal headlines.  Just when we were getting used to the idea that the debt-ceiling debate could drag on into November, politicians seem to be acquiescing to Main Street's admonishment (because Main Street is more focused on tonight's midnight deadline marking the expiration of Treasury's authority to borrow money as opposed to the actual date that we'd no longer be able to pay all our bills) and at least look like they're more serious about getting something done today.  If any of the reaction to headlines over the past 2 weeks are an indication, this is supposed to be negative for bond markets.

Charts

Today's chart is a reprise of the concepts discussed on October 1st.  Take a look: The Day Ahead: Assessing Shutdown Fallout.  We noted the waning positive momentum indications as well as the instance of the "green line"  having a "nasty habit of bouncing upon this first return" to the mid-point of the MACD indicator.  

Today's chart simply updates the same analysis (with a few other moving averages and trendlines thrown in).  The important point is that even in the face of the shutdown, 10yr yields still adhered to this common technical pattern.  If nothing else, it's good to see that there's at least something to go on in the absence of so much of what we'd normally be going on (most of the relevant economic data).

If everything goes pear-shaped when you look at this, don't be intimidated.  Direct your eyes to the first white circle where the green line crosses into negative territory on the lower section of the chart.  That's where history suggested September's move lower in rates would run out of steam.  It did.

Then direct your eyes to the next white circle where the purple line crosses above the green line (or where the blue-ish bars rise above zero).  That's additional confirmation that the September rally was over and a preliminary suggestion of a move in the other direction.  History is mixed on whether or not that move in the other direction is temporary.  In some cases it's lasted only a few weeks, but much longer in other cases. 

Those two white circles are really the most important features of the chart.  All the lines in the upper section are just guideposts for the movement.  The dark blue line is the 5yr moving average that we'd discussed frequently a few weeks back.  The white line is a 50-day moving average included for no other reason than that's where yields landed on Tuesday and it's a "nice round number." It also coincides with 2.75, or thereabouts, which has been a technically significant inflection point for 10yr yields.

Note: the reports that would have been released this week are struck-through in this calendar.

MBS Live Econ Calendar:

Week Of Tue, Oct 15 2013 - Fri, Oct 18 2013

Time

Event

Period

Unit

Forecast

Prior

Tue, Oct 15

08:30

NY Fed manufacturing

Oct

--

8.00

6.29

Wed, Oct 16

07:00

MBA Mortgage market index

w/e

--

--

455.9

07:00

MBA 30-yr mortgage rate

w/e

%

--

4.42

08:30

Consumer Price Index

Sep

%

--

--

10:00

NAHB housing market indx

Oct

--

58

58

Thu, Oct 17

08:30

Initial Jobless Claims

w/e

k

335

374

08:30

Housing starts number mm

Sep

ml

0.919

0.891

08:30

Building permits: number

Sep

ml

0.943

0.926

09:15

Industrial output mm

Sep

%

0.4

0.4

09:15

Capacity utilization mm

Sep

%

78.0

77.8

10:00

Philly Fed Business Index

Oct

--

15.5

22.3

Fri, Oct 18

10:00

Leading index chg mm

Sep

%

0.6

0.7