MBS Day Ahead: Wednesday Before NFP. Time For Things to Get Serious

To be fair to the Wednesdays before NFP, sometimes they get serious and sometimes they don't.  As always, the determining factor is whether there is enough of "something" present in markets tomorrow.

"Something" can't just be anything.  It has to be a market mover, and there are only so many.  The overt candidates are obvious: the big data releases.  On the Wednesday before NFP, this typically includes ADP Employment and ISM Non-Manufacturing.  What we'd be looking for in order for things to "get serious" would be a unified message across discrete data sets.  In other words, if ADP and ISM are saying the same thing in a loud enough voice, that's usually enough to get a pre-NFP snowball rolling. 

The other "something" occurs when the snowball already exists due to previous trading, data, and position-taking, and simply needs the hill to clear out before it starts rolling.  These are the cases where we end up scratching our heads wondering why bond markets steamrolled right past data that may have been suggesting a different move.  It's much less common than the the "unified data" scenario, but it can happen.

Whether or not it happens in the current scenario is less certain.  I'd say that the existing strength of the rally from mid July leaves us more at risk of tradeflows seeking to lift off the accelerator ahead of an NFP that could really change the state of play. 

Here's what I mean...  The concept of "global growth concerns" is waxing again, due to things like recent wage/inflation data, China, Greece, commodities, and disparate monetary policy moves between various global central banks.  If there's one report that has the power to quell a noticeable chunk of those concerns, it's Friday's NFP.  So traders might be hesitant to take the recent rally (which is already strong by 2015 standards) any further until they see that NFP confirms the concerns, or at least doesn't do anything to refute them.

With all that in mind, there's a chance the the bar will be set high today for weak-ish data to facilitate a rally.  The nifty, implicit counterpoint would be that if we see a rally on weak-ish data or better, it would be a tremendously strong commentary on pre-existing snowballs (aka, underlying positive momentum).  I think the counterpoint is a long-shot, but if we see it, it's a big deal.