MBS Day Ahead: Important Econ Data, But With Wild Cards In Play

Everywhere you look, pundits are slamming the bond market, both at home and abroad.  This is usually the first sign that we're about to bounce back into stronger territory.  All we need is one or two more self-annointed gurus to proclaim the end of low rates forever in order for rates to come crashing back down.  That's the way it usually works, anyway, but it's good to remember that even even broken clocks are right twice a day. 

It's also good to identify legitimate risks and hedge one's bets in the event that the broken clock (or the boy who cried wolf, if you prefer) is indeed telling the truth.  Conceptually, I will say that I'd need more convincing when it comes to the current sell-off marking the end of the long term bond rally.  But practically, my lock/float strategy would say otherwise (and has for several weeks).

Moreover, despite needing more convincing about how bad things might be, I would also say that they're as bad as they have been since the long term rally began in early 2014.  By bouncing higher over the past 2 weeks, US rates are making a major "higher low" in that long term trend for the first time.  Things are even more ominous when we examine the source of the long term rally (also quite clearly the source of the recent pull-back).

The fact that European bond markets are looking so shaky is a blessing and a curse.  The curse part is pretty obvious, but it's a blessing in that it takes some pressure off this week's economic data to cast deciding votes on the fate of the bond market.  Indeed, that deciding vote has been and continues to be Europe's vote to cast in the big picture.  That said, domestic economic data is, by no means unimportant--especially if Europe is abstaining. 

Implied, but not explicitly stated is the fact that strong data and further European selling would be a severe one-two punch for bond markets, possibly resulting in the type of panicked sell-off we haven't seen since mid 2013.  This is the risk to guard against in the short term, though it's far from a given.

Today's headliner is ISM Non-Manufacturing, one of the very few notable runners-up to NFP when it comes to market movement potential.