MBS Day Ahead: Yellen Testimony, Retail Sales, and Housing Data

Last week was a dud in terms of scheduled events.  This week isn't the polar opposite, but it's much more active.  Monday and Friday are the only days without at least a few interesting items on tap. 

That said, merely knowing that there's a good amount of data on tap doesn't do much to suggest what will move markets.  We've seen more than our fair share of rates moving in the opposite direction from what the data seems to suggest in 2014.  That makes it hard to look ahead to particular events and say things like "if this report is strong, rates should rise."  Indeed, that hasn't been a safe way to assess the road ahead recently.

The technical landscape seems important.  That is, bond markets--either by coincidence or design--have keyed in on trading levels and ranges that have some of their own significance, regardless of the incoming data.  There's a whole mess of this 'technical' stuff in the 2.34-2.51 area in 10yr yields.  This is sort of the "no man's land" representing the journey between the most repressed yields in history and--well--everything else.

In 2014, yields were as low as 2.40 briefly, and recently returned to bounce around 2.50 on Thursday and Friday.  The risk to the low-rate outlook is that we're witnessing an extended bounce in this zone and a refusal to return to the mid-2011-mid-2013 range.  Incidentally, 2014's lowest yield represents a perfect bounce on 2011/2012's highs.

We can see these lines in the sand in front of us, but can't really know would get us across them.  There are candidates to be sure, but good luck when it comes to ranking them.  With economic data not producing consistent results, perhaps Fed policy is more worthy of attention.  With that in mind, Tuesday and Wednesday bring the semi-annual congressional testimony from Fed Chair Yellen.  Of the two, Tuesday is the bigger potential market mover.

Beyond that, geopolitical risk and European flights-to-safety (inspiring by things like Portugal's banking issues) are constant wild cards.  As far as economic data most likely to do what it normally does (where strength hurts bond markets), Retail Sales on Tuesday is probably the best bet.  Thursday is no slouch, however, with several big reports and the weekly Jobless Claims data covering the same week as July's NFP survey (meaning this week's Claims data is perceived as more relevant by market participants).