MBS Live Week Ahead: Bonds Begin Week Storing Energy For a Breakout

Last Friday's AM commentary had a detailed write-up on the significance of "month-end bond buying." Here's a link to that, and here's a link to our primer on the topic.  With today being the last day of July, it's possible we'll still see some random momentum due to the month-end process, but would expect a relatively higher proportion of traders to have gotten those housekeeping trades out of the way last week given the generally lower liquidity of summertime Mondays.

The week ahead is no slouch though!  There is a slew of top tier economic data, and some of it is exceptionally important.  Specifically, tomorrow morning brings the Fed's favorite inflation gauge: year-over-year Core PCE.  They'd like that to be at 2% in a perfect world.  It's currently at 1.4%, down from 1.8% 4 months ago.  This drop from "nearly 2.0%" is part and parcel of the Fed's more dovish tone in recent months.  Any meaningful move back toward higher levels could be taken as an early sign that the recent slowdown in inflation is indeed "transitory."  

As is typically the case for the first week of any given month, we'll also get ISM data, ADP Employment, and Nonfarm Payrolls.  Markets are somewhat less focused on employment metrics currently, because the Fed's big problem is inflation.   While the wage growth component of the jobs data can be traded as an inflation indicator, it's been filling that role less and less as markets haven't seen that data flow through to inflation metrics.

Perhaps the most interesting order of business this week is the technical landscape itself.  Bond markets have been exceptionally flat since last Tuesday's big day of volume/volatility, and all subsequent trading has occurred inside that range.  These patterns typically precede a bigger breakout and the start of a new phase of momentum.