MBS DAY AHEAD: Bored By Opening Acts, Waiting on Fed to Raise the Roof

By: Matthew Graham

Financial markets exuded a distinct lack of inspiration yesterday, not unlike a concert audience when the opener is a band they've never heard of. Some of the audience is at the concession stand, some is using the restroom, some are talking loudly to each other and tuning out the music, but they're all obviously in the building for the same reason--Thursday's FOMC Announcement.

Market participants are obviously "in the building" in the sense that trading strategies seem well-contained by the metaphorical walls of various trading ranges.  In fact, those walls have been closing in on us ever since the world didn't end after the China-inspired flight-to-safety in late August.  In other words, most market sectors have been consolidating--classic behavior ahead of a big piece of news capable of causing a big breakout in one direction or the other.

 

 

Why is this classic behavior?  Pretty simple really...  Big news causes big market movement, and many traders already know how they'll adjust trading positions for any given outcome.  Because they know it's going to be a busy day, they want to stay as nimble as possible so they can make either move, depending on the outcome.  As such, trading levels tend to increasingly hone in on that collective point of equilibrium, oftentimes finding it right around the same time that the event in question causes an explosion in one direction or the other.

Of course things don't always happen the same way when it comes to markets.  All too often, we've seen seemingly big-ticket events flop and produce surprisingly little market reaction.  If I had to guess, I'd say this Thursday is less likely to be one of those flops, but that may be most keenly felt in markets other than MBS. 

The other way this script often gets rewritten is for a 'lead-off' to take place in the days leading up to the event.  In the current case, that could easily be kicked off by something like a major beat or miss in this morning's Retail Sales data.  We shouldn't expect one little piece of economic data to cause excessive drama at this point, but it could be enough to shake one of the walls of this building, or possibly even raise the roof.  If you see Yellen pushing her palms up at the ceiling on Thursday, you'll know.