The Day Ahead: Assessing New Range after Beating the Odds

By: Matthew Graham

Yesterday

- Yellen Confirmation Hearing helped bond markets solidify/add gains

- No major surprises from Yellen, but resolute in current need for QE

- Much of the rally happened in the previous session, limiting yesterday's overall gains

- Positive day confirms shift in trend

Today

- Busiest morning of economic data this week, but none of it too exciting

- Market attention turning toward more important considerations in coming weeks

- New sideways range to asses after yesterday ended post-NFP selling trend

Strategy

Bond markets beat the odds and have now successfully pushed back against the losses seen after last week's strong jobs numbers.  In order to be deemed 'successful,' we were looking for two consecutive sessions with prices moving back into the range of prices seen on NFP Friday with 10yr yields trading below 2.75 during all the while.

When it comes to technical conclusions like this, there are no guarantees and they can't ever speak to anything more than probability, but given the choice between the historical probability of further weakness into the month of a strong NFP report and the possibility to avoid said weakness, current technical developments do nothing short of keeping hope alive.

The tricky part will be assessing threats to that hope.  At some point we'll have a down day in the near future (or "up day" in terms of yields), and consumers and originators alike will have to decide if it's time to take chips off the table.  Sitting several bps below 2.75+ in 10yr yields (and well into a 4.375% best-execution 30yr fixed rate) affords a small amount of breathing room to use these levels as lines in the sand to suggest further action. From there, it becomes a much more personal decision as to how many points and counterpoints you might consider before locking. 

Today's economic data won't be much help.  All of it is 2nd tier except in extreme cases (i.e. it can cause movement if it's insanely far from expectations).  That leaves us to watch trading levels today and hope that 2.75 continues to hold as support.  On the other end of the near term range, 2.67+ is the current resistance target.  Breaking below that would suggest reassessing strategy. 

Beyond the short term, the bigger considerations will be next week's FOMC Minutes, a big week and a half of data before the holiday, and then NFP.  By the time that NFP prints, market participants will have a pretty clear picture of what they THINK the Fed will do at the December meeting.

Charts

One thing to keep in mind when watching for breaks of the trend is that it's rarely as simple as yields ticking, for instance, from 2.75 to 2.751.  In the most recent case, we spent an entire day trading over 2.75, but ultimately did not "confirm the test" by closing over 2.75 for a consecutive day.

MBS Live Econ Calendar:

Week Of Tue, Nov 12 2013 - Fri, Nov 15 2013

Time

Event

Period

Unit

Forecast

Prior

Tue, Nov 12

08:30

National Activity Index

Sep

--

--

0.14

10:00

Employment Trends

Oct

--

--

114.8

13:00

3-Yr Note Auction

--

--

--

--

Wed, Nov 13

07:00

MBA 30-yr mortgage rate

w/e

%

--

4.32

07:00

Mortgage market index

w/e

--

--

449.6

13:00

10yr Treasury Auction

--

--

--

--

14:00

Federal budget, $

Oct

bl

-104.0

75.1

Thu, Nov 14

08:30

Initial Jobless Claims

w/e

K

330

336

08:30

International trade mm $

Sep

bl

-38.6

-38.8

13:00

30-Yr Treasury Auction

--

bl

16.0

--

Fri, Nov 15

08:30

Import prices mm

Oct

%

-0.4

0.2

08:30

Export prices mm

Oct

%

0.1

0.3

08:30

NY Fed manufacturing

Nov

--

5.00

1.52

09:15

Industrial output mm

Oct

%

0.1

0.6

09:15

Capacity utilization mm

Oct

%

78.3

78.3

10:00

Wholesale inventories mm

Sep

%

0.4

0.5

10:00

Wholesale sales mm

Sep

%

0.3

0.6