The Day Ahead: ADP Employment, New Home Sales, and ISM Services

Yesterday

– Data-free day proved frustrating for MBS

– Despite Treasury Improvements, MBS lost ground

– Lenders repriced in the afternoon, rates at or near 2-mo+ highs

– Several potential problems ‘ganging-up’ on MBS, some will expire by Friday

Today

– Biggest collection of economic data this week

– ADP Employment leads off at 8:15.  Somewhat of a proxy for NFP.  Highly Important

– ISM non-manufacturing and New Home Sales at 10am, both important

– Trade Gap at 8:30am. Not as important

Strategy

MBS are having a bad few weeks since FOMC Minutes reignited a PORTION of tapering possibilities in December.  We say “portion” because it’s not as if the FOMC Minutes magically put create better than a 50% chance that the Fed moves to reduce asset purchases this month.  But if the remaining data this week is decidedly strong, and especially if Friday’s NFP is exceptionally strong, a December taper suddenly wouldn’t seem out of the question.

In that sense, there is an awful lot potentially riding on the upcoming data.  Of course Friday is the big day, but today has the power to start the lead-off in one direction or the other.  Unfortunately, unless ADP Employment suggests a massive NFP whiff, bond markets won’t be overly eager to jump on a big rally when NFP might easily suggest a move in the other direction.

Every indication we have from yesterday’s data-free trading is that bond markets will take their directional cues today from the data.  With that in mind, ADP and ISM are the two biggies-in order.  In a different league, but still relevant, is New Home Sales at 10am.

Charts

Technicals in Treasuries still leave room for a move weaker, though momentum definitely took a break.  Econ data likely makes the decision.

Here’s a quick look at MBS’ extended pout session since FOMC Minutes.  So even if 10’s are holding their ground, MBS might not be.