MBS Day Ahead: Still Very Much About Shaping Fedspectations

There are clues in yesterday's session as to where our attention should be focused in the next two weeks.  There may well be clues in this morning's Retail Sales data and after we see the market's reaction, we'll be better able to assign weight to the clues.

Clue 1: The Stock Lever

This was the theme of yesterday's RECAP.  The gist is that we hadn't seen as much activity in the stock lever in 2014 until last week's Jobs report.  That would beg the hypothesis "maybe it's more about the jobs report," but again, we saw notable involvement from stocks yesterday (in that their weakness was our strength, at times).  Specifically, note the time frame beginning at 9:30am when cash equities begin trading.  This was the most heavily correlated time of day.

But what's up with 2pm?  Why did bonds get off the proverbial escalator there instead of, say, their 3pm pit close (normally the time of afternoon that bonds will do something different if they're going to do something different)?  The answer is surprisingly straightforward and has to do with clue 2.

Clue 2: Fedspectations

It seems that markets aren't wholly resolved on the topic of the Fed's January meeting in 2 weeks. While it doesn't make any logical sense to infer a change in the course of action based on last week's jobs (yet), we can now see there's at least some of the sentiment in the marketplace.  In other words, some players are clearly entertaining the possibility of a softer statement from the Fed.  Why so clear?

Because the point at which bonds got off the stock escalator yesterday was exactly when the Fed's Lockhart said the December Jobs Report doesn't change his policy view (1:53pm).  This is very much in line with the assertion in yesterday morning's notes: "We're most likely to find that one bad jobs report means very little in
the grand scheme of things and FOMC members have said as much."  But apparently market participants aren't all on board with that, and Lockhart adding his name to the hat has helped weed a few more out.

Between now and the Fed Announcement 2 weeks from now, further weeding can be accomplished by data and Fed speakers.  To that end, tomorrow doesn't offer much in terms of Fed speakers.  While there are two speeches during market hours, they're from Fisher and Plosser, their stances are no mystery (they hate hate QE and want it to go far far away forever and ever).

There will be data though!  And it's a solid offering in the form of December Retail Sales.  The consensus calls for a drop in the headline from 0.7 to 0.1 but for an unchanged reading when the automotive sector is excluded (0.4 vs 0.4 previously).  Though not the subject of economist surveys to sufficient extent for estimates, "Core" Retail Sales (excluding autos, gas, and building materiels) will also be important in attempting to divine how the Fed may view incoming data.