The Day Ahead: Tuesday's Strength Introduces Stronger Possibilities

Yesterday

- NFP Came in at 148k vs 180k forecast, Private Payrolls 126k vs 180k

- Definitely weak enough for a rally, and a rally we got

- 10yr yields dropped 10bps and Mortgage rates about the same

- Promising technical developments depending on how rest of week goes

Today

- Promising technical developments get put to test

- Slow day for data with just Import/Export Prices and FHFA Home Prices

Strategy

September 18th's FOMC Announcement set off warning bells about a potential move lower for rates but such a move was always to be dependent on September's NFP (originally scheduled for October 4th).  10yr yields had trickled down to 2.59 (closing level) by 9/30 and never closed lower while the shutdown kept NFP on hold. Then and now, we've maintained that markets needed the NFP data to make a move out of that post-FOMC holding zone, and we finally got it yesterday.

The biggest highlight of the jobs report was the 126k private payroll creation compared to the 180k forecast.  Momentum is undeniably skewed to the downside for labor markets from more bullish moments such as the first part of 2013 or the ENTIRETY of 2011.  Labor market bearishness brings the econo-bear is out of hibernation and the streams are filled with nourishment such as the fiscal drag timeline stretching to March 2014 and the ongoing low inflation environment.

All of the above paves the way for Fed easing to remain in place well into 2014.  Interestingly enough, 15 out of 18 primary dealers agreed when surveyed yesterday.  And just like that, we've pushed back the tapering consensus 6 months from September to March.  Keep in mind that, for some time, any mention of "tapering" is really just shorthand for the overall tone and pace of the Fed's quantitative presence in Treasury and Mortgage markets.  We don't really care when they taper, but the inception likely confirms they've seen enough of a shift to begin the process (obviously).

For now, all of the above suggest that bond market weakness has more to prove than strength, though strength will still have to prove itself a little.  That process begins today, but will be more reliably assessed with next week's FOMC Announcement and the following week's NFP (yes, the next NFP is only 2 weeks away).  Today's data isn't super significant and because of the heady events in upcoming weeks, the technical trading activity may be more noise than confirmation.

Charts

Additional improvement will be increasingly hard fought as rates move lower from here.  We wouldn't expect to see this epic inflection zone fully moved-through without significant motivation.

This chart has Bollinger Bands in teal with some annotations showing just how bearish the environment has been for Treasuries (and MBS are guilty by association).  Each white oval is another instance of 10's closing more than 2 standard deviations above a moving average, effectively reinforcing the trend.  When yields approach but FAIL to break the outer bands after touching or moving through the middle band, the trend is in question. 

Early September called the uptrend into question and late September called the downtrend into question.  Finally, the brief uptrend into the debt-ceiling deal fizzled quickly as the deal was signed and 10's went right back to the same 2.59 closing low seen on September 30th to await further instructions from NFP.  Then, in fairly grand fashion, yesterday's NFP day offered the first reinforcement of a bullish trend seen since February (not pictured in the chart).