The Day Ahead: Exhausted, Bond Markets Wait For Next Wednesday

Yesterday

- Bond Markets barely weaker overnight, more so after first round of data

- Stronger Retail Sales outweighed seasonally volatile Jobless Claims in the AM

- 10am Business Inventories didn't help, but bonds were weakening again beforehand

- 30yr Bond auction DID help, but afternoon gave way to sloppy afternoon selling

- MBS and Treasuries spend most of the past 2 hours at weakest levels

Today

- No data on the calendar except Producer Price Index (PPI)

- Despite its old-school cachet, PPI doesn't matter right now

- Only obvious event that matters is next Wednesday's FOMC Announcement

- ALL about biding time until then.  Bond markets would rather be napping

Strategy

It's been a rather exhausting year for bond markets.  Unlike the past 3 years, 2013 marks a substantial dose of selling.  Not only that, but the selling followed a substantial dose of utterly repressed, ultra-range-bound, Eurodrama-inspired, ultra-low rates in 2012, and very mild selling pressure into the start of 2013.

All that means is that the really big sell-off beginning in May followed a moderate sell-off in the first half of the year, and an almost imperceptible sell-off coming off all-time low rates in 2012.  It's actually the first time in decades that things have happened in exactly the same way--a fact that has added to the exhaustion and panic in 2013 (see charts below). 

As we frequently discuss, Nonfarm Payrolls and FOMC Announcements are the two most significant regularly scheduled economic events.  With the passing of the year's last payrolls report last Friday, it came down to next week's FOMC Announcement to determine whether or not we'd see any more significant movement in 2013.  The significance is compounded by the economy's position somewhere on the fence between QE and "less QE." 

Bottom line, there's ample reason for exhaustion, and we're seeing it in trading levels.  It increasingly looks like bond markets knew generally where they'd like to set up for the approach to next week's FOMC.  We're essentially there now and mentioned this yesterday (i.e. "hunkered down"), so there's really nothing else that looks remotely interesting before next Wednesday.

This includes today's Producer Price Index.  The problem with this report is that it used to be quite important.  Either you've experienced this personally or been educated by someone who has.  This is, in fact, one other issue that makes 2013 exhausting.  Old dogs may be exhausted because the perennial bond-bullishness that's worked for 30 years (and that's normally gone hand in hand with things like low PPI) has taken the whole year off, and the forward thinkers are exhausted by actually trying to stay on top of such things. 

The symptom of the exhaustion is decreased participation, liquidity, and conviction.  This isn't a market that wants to make big moves before the end of the year for any other reason than the FOMC announcement.

Charts

This white line is a 6-month moving average of daily closing marks.  It strikes a good balance between smoothing out smaller-scale volatility while still capturing broad-scale trends.  I know it's only a subtle difference, but this "rounded" shape in 2012-2013 is a first.  Maybe it means something...

Next chart is QUARTERLY candlesticks with a Bollinger Band study.  Similarities to 1999 persist.  This also speaks to the fact that 2013 is "different."  The next time you hear someone say "people have been saying 'this year is different' for the past 3 years, and it's bounced back every time," show them this chart.  That's not to say it couldn't bounce back.  Anything can happen in markets, just that this time is--in fact-different.