MBS Day Ahead: Retail Sales Casts a Vote on Bond Market Rally

It seems a bit oversimplified and a bit old-school to look to economic data as holding the key to a potential bond market rally.  After all, economic data has been less relevant to bond markets in 2014 than we've ever seen.  Of course, if the data changed enough, it would get very important in a big hurry (like if inflation picked up enough, for instance), but we're not at risk of that happening any time soon. 

On the other side of the coin, we're not at much risk of data getting so bad that it would pressure yields significantly lower.  In other words, things have been pretty good, judging by the numbers, and it would take a prolonged stint of weaker data to suggest otherwise.

Markets know this.  It's one reason for a lack of volatility in 2014--this phenomenon where so few potential outcomes will actually result in a change to Fed policy (or to inflation).  So econ data has instead taken on the roll of "helper monkey."  OK, so "helper monkey" isn't the right analogy here, but it sure was fun to write it. 

The point is that bond market trends have taken their cues from non-data factors primarily, but when the data falls in line with the underlying bias, it can give things an extra push.

This is exactly the position that today's Retail Sales report finds itself in.  It really holds no power to dictate bond market trading levels on any sort of larger scale, but it happens to be in the right place at the right time.  The "right place" in this instance simply means that market momentum has reached another tipping point where the recent weakness in bonds is open to positive suggestion.  A weak Retail Sales report could give us a much-needed push in that case. 

And while a stronger report could put us on the defensive, we have a clearly-defined line in the sand at 2.40% in 10yr yields that would let us know if it's time to panic.