The Day Ahead: Economic Data Picks up; Rally Being Tested

Yesterday

- Bond markets started stronger, improved modestly, and faded in the afternoon

- Tuesday's closing levels were ultimately defended, but only just

- No significant data or events in play; Technicals and Tradeflows dominated

- Rates fell a bit further into 4-month lows

Today

- Some previously delayed data returns, but nothing earth-shattering

- It's still better than yesterday in terms of economic data with several reports on tap

- Jobless Claims is probably chief among those, but New Home Sales at 10am has potential as well

- Jobless Claims may be passed over if there are "yeah buts" or simply due to recent volatility

Strategy

On some levels, yesterday's trading session could have been frustrating for bond bulls (aka fans of lower rates) due to the late day sell-off.  A few lenders repriced for the worse, but most didn't.  Ultimately, prices ended the day in line with the previous close.  To put things in perspective, that "previous close" was about half a point higher than any other close in the last four months.  To put it in even more perspective, it's not exactly healthy for rates to fall any more quickly than they already are.  Corrections, pauses, retracements, and consolidation all promote sustainability for rallies that hope to see old age.

Whether this one sees old age or not remains to be seen, but for the first time in a long time, the offer is at least on the table.  As we've discussed, it will probably have a lot to do with the NEXT jobs report that's only 2 weeks away.  In the preceding week, there will be a ton of data and an FOMC Announcement.  That data will likely offer course corrections to broader trends, and between now and then, we have today and tomorrow with "some" but not "lots" of important data.

Whether or not today's Jobless Claims data is "important" is open to debate.  If the shutdown caused issues, the Labor Dept will likely make a note of it and any zaniness in the numbers will be dismissed.  If there is no such note, zaniness in the numbers could still legitimately be dismissed as the series has been volatile in general and market participants would still assume some measure of osmosis from the shutdown into non-government agencies. 

Amid the lack of major eye-openers, the technical trading levels continue to be useful.  Despite our focus on MBS in general, Treasury charts are better-behaved when it comes to technical analysis, so if spreads between MBS and Treasuries aren't so divergent as to send mortgage and Treasury rates in opposite directions, something like a 10yr Treasury yield will be more informative.  In that regard, yesterday tested the 2.47 inflection point and met with resistance.  2.506 and 2.55 offer more supportive ceilings if yields are moving higher.  If we're rallying, the next major technical target is around 2.42 and would be a fairly big deal (see it in the 3rd chart below).

Charts

10yr Treasury yields and selected pivot points.