MBS Live Week Ahead: No Relief For Bonds as Busy Week Begins

Last Friday's morning commentary wasn't necessarily fun to read for fans of low rates, but it was important to digest for those that want to be prepared for both positive AND negative outcomes in bonds in the coming weeks/months.  Click here to revisit it.  Depressing as such things may be to consider, it's a fact of life that periods of rising rates will eventually follow periods of falling rates.  While it's still a bit too soon to boldly and firmly declare the great rate rally of 2019 has given way to a rising rate trend, it's definitely not too soon to observe the clouds swirling on the horizon and to batten down the hatches until we see exactly how big this storm might be.

In the week ahead, we'll get several key pieces of data as well as another installment from the Fed.  On the data front, Friday's NFP always deserves the widest berth, even if it hasn't consistently produced the biggest bond market reactions recently.  The point is that a big enough beat/miss in NFP will always be capable of inspiring big swings in bonds.  The ISM Manufacturing data that follows 90 minutes after NFP isn't far from the top of the heap these days, and if NFP doesn't cause much of a stir, the 10am ISM data becomes the week's biggest deal.

There's quite a few days that typically occur before Friday, however!  One of them is known as Wednesday, and this week's example could be a fairly big deal.  ADP Employment and the Advance GDP release (the 1st reading for Q3) will get things rolling in the morning, but the bigger to-do will be the Fed Announcement at 2pm.  The Fed is all but guaranteed to cut rates at this meeting and that makes things potentially dangerous.  

Why is a rate cut dangerous?  First off, if it's 100% priced-in to bond markets, there's no additional benefit to be had from the cut itself.  This also places more emphasis on the verbiage of the statement as well as Powell's press conference.  Given the trade-related progress since the last meeting and the extension of Brexit (two key issues for the Fed when it came to justifying recent rate cuts), it's not hard to imagine that their tone might shift in a more hawkish direction.

As for the charts and trends, this morning's weakness only further solidifies the unfriendly break outside the recent consolidation range.  Such breaks can often result in increased momentum/weakness.  A break above 1.90/1.94 could make things even worse in terms of accelerating selling pressure.