MBS Day Ahead: Rates Head For Conflict Resolution As Data Heats Up

Today is the first day of a new month and new quarter, and Octobers have historically been active for bond markets.  That leaves us to wonder whether the activity will push back against the mostly negative September.  There are excellent cases to be made for avoiding any major push higher in rates until the struggling masses below the line of accelerating net worth can afford to buy anything or borrow any money.  Heck, it'd go a long way if we could even have something other than lower real wages for 80% of Americans from 2007 to present (seriously...).

While such thoughts are probably good enough to prevent any abrupt runs over 3% in 10yr yields or 5% in 30yr fixed rates, there can still be plenty of volatility down in these historically low rates.  Most of the trading we've seen since mid-September has suggested that we're reestablishing a counter-trend leading to lower rates, partly (or even fully?) making it back to late August levels.

One of the events we keep coming back to as a key player in the early-September lift-off from those late-August lows is the ECB's (European Central Bank) half-cocked QE announcement.  The popular explanation for the bond market weakness was that the Fed was considering removing their "considerable time" verbiage, or otherwise crafting a less bond-friendly statement.  The ECB reaction was possibly an even more important ingredient though. 

Now tomorrow, the ECB will be back with its first announcement and press conference since early September.  Depending on what's said, and depending on the extent to which it really was a key ingredient in September's weakness, now could be the time where we see what markets really care about--bond markets anyway. 

The Wednesdays before ECB Thursdays are always a crap-shoot.  At times, they've represented "lead-offs" that are followed up with more of the same movement on Thursday and then again on Friday after NFP.  At other times, Wed, Thu, and Fri have each gone in a completely different direction from the previous day. 

ADP Employment at 8:15am is always a contender to kick off the day's market movement.  But with today being the first day of a new quarter, we may well have a lopsided tradeflow rally or sell-off regardless of the data.  The technical landscape will get at least some information in that one of the two conflicting trendlines in the chart below must be broken.  All other things being equal, whichever line breaks, bonds will be predisposed to follow through in that direction.