The Day Ahead: Employment Situation Report Matters Either Way

Yesterday

- Very slow session for multiple markets including Treasuries and MBS

- Prices moved lower throughout the session, but maintain favored pre-NFP range

- 10's held 2.62-2.59%, Fannie 3.5 MBS 101-25 to 102-01

- Rates were modestly higher; No reaction to Home Sales data; waiting on NFP

Today

- NFP!  (aka "nonfarm payrolls," the chief component in Employment Situation)

- payrolls surveys took place in mid September and are thus untainted by shutdown

- NFP was originally scheduled for Oct 4

Strategy

Will absence have made the heart grow fonder when it comes to bond markets' affections for the payrolls data?  Yes, it already has.  If Treasuries and MBS weren't forced to adjust trading levels on the heels of the short term funding market disruption leading up to the debt ceiling deal, they may well have held one of their narrowest ranges of the past several years.  After the debt deal they moved right back to these narrow sideways ranges (see 1st chart below).

It's a popular misconception that the shutdown made for market uncertainty in and of itself.  In fact, it was the lack of economic data that most paralyzed trading levels--especially the lack of NFP and especially for bond markets.  All that having been said, massive movement isn't guaranteed today (though it's certainly possible).

If we DON'T see massive movement, it will still be quite informative.  If the report comes in healthily better or worse than expected and bonds aren't looking too impressed or dejected, it would serve as good confirmation that Fiscal drama legitimately paused traders expectations regarding the FOMC, and that we could be waiting until the next bout of fiscal drama in Q1-2014 before embarking on an extended trend.  As for now, we seem to be considering a deeper correction into more positive territory or a return to recently weaker levels.

Charts

10yr Yields and MBS.  The "weak" sections below refer to potential trading ranges following a weaker-than-expected NFP report.  The "strong" section connotes a strong NFP print and would likely lead bond markets back to the "recently weaker levels" mentioned above.  In those cases, both Treasuries and MBS could hope to find support at those range boundaries.

US Private Payrolls vs ADP Private Payrolls