MBS Day Ahead: Economic Data Colliding With Technical Resistance

The past two trading sessions have been highly informative for bond markets.  As we've been discussing almost incessantly, there is good reason for bonds to be more focused on economic data at the moment.  This has to do with the fact that the last jobs report joined a slew of other weak economic data to cast doubt on the advisability of the Fed raising rates.  At the same time, we've heard from several Fed speakers and even Mario Draghi regarding justifications for a Fed rate hike that transcend economic data. 

That leaves us with the uncomfortable task of sorting out whether or not the Fed would actually be dissuaded by bad economic data or whether they're hell bent on hiking simply to prevent some perceived risk to financial stability.  There are so many dueling banjos in this regard, that it puts even the rowdiest of ho-downs to shame.

Really, the only way we can hold economic data up to the fire is to ask if it's creating the movement it "should be" creating.  Now, "should" is a tricky word when it comes to cause and effect relationships between events and market movements.  No one can ever know all of the motivations and considerations behind trading decisions.  All we have is our best guess at what should matter.  When there's a consensus on that, it affords a bit more confidence, and indeed there's a consensus in the trading community that economic data matters more right now.  As such, negative economic data SHOULD be helping bond markets.

The tricky part is that negative econ data HAS BEEN helping!  It's just that the helpfulness has been getting unwound in close enough proximity that the "help" isn't readily detectable a short while after it's received.  The risk is that there's some sort of technical barrier that's proving too big a challenge for a few mid-tier data points to break.  We'll know this for a fact if more weak data fails to get 10yr yields below 1.84.  It could just be the market's way of saying "we're going to need to see more evidence."  Even worse, it could be a way of saying it doesn't care about data as much as it cares about putting in a big bounce at long term trend boundaries (either the horizontal inflection point at 1.84-1.86 or the lower trend channel line).