MBS Day Ahead: Technical Trading Meets Potentially Important Economic Data

Bond markets have arguably been trading in accordance with the mainstream technical suggestions.  Specifically, there are several technical studies so common that traders can assume other traders are at least aware of their implications.  Last week saw all these garden variety studies clearly point toward a shift higher in Treasury yields.  There's a more detailed discussion on that HERE.

As shocking as it may be (/sarcasm), technical analysis doesn't actually predict the future.  It's just another lens through which to view and measure market movement in search of potential significance.  For instance, if we talk about the concepts of 'support and resistance' (which would be like 'ceilings and floors' respectively in terms of rates), what we're really getting at is the significance associated with a break of those levels. 

In other words, if I say yields have support at 2.74, that says less about whether or not they might bounce at 2.74, and more about what a bounce/break at 2.74 tells us.  If yields bounced, the thesis that day would be "trend reinforced; future break is now slightly more significant." 

As of yesterday, the aforementioned 'mainstream technical studies,' are maintaining their negative outlook for rates.  One silver lining to one of these studies is that if the current trend of toward higher rates isn't too strong, we're already near levels that would likely mark the first push back against that trend (look back at how February's yields rose to the middle blue line and "hung out" there without proceeding to the upper blue line for an example).

The question that will be answered today--assuming the data falls far enough from consensus--is whether or not bond markets are interested in economic data.  The paradoxical rally after the May 2 NFP reading casts some doubt in that regard.

Today's test subject for "economic data vs technicals" is April Retail Sales data.  This is also one of, if not the most important pieces of data this week.  It's hit and miss in terms of consistently moving markets, but the 'hits' can be big.  Today's forecast calls for a drop from 1.2 to 0.4 overall, but only from 0.7 to 0.6 excluding automobile sales.