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There may be some sort of pattern developing here...  In terms of volume and volatility, Monday's domestic session was dead, or perhaps undead.  Yes, it was some sort of zombie session where 10yr yields and MBS prices alike roamed the countryside in a sleep-like trance, looking for brains, but ultimately getting upstaged by a more dynamic hero.  This zombie movie casts Tuesday's trading in hero role with huge volume and a wider, more volatile range.  But it was back to zombies yesterday, only more of them this time...

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So we can only surmise that today's trading session must shift back into something other than a boring sideways grind if it's to keep with spirit of the genre.  After all, I'm pretty sure the formula is as follows: some zombies, hero defeats some zombies, more zombies show up (see the higher volume on Wednesday than Monday!), and more action ensues.  Incidentally, sometimes that second round of zombie fighting action sees more  casualties for the protagonists, so we're not assuming another 10bp rally lower in 10yr yields.

You also might be surprised, and somewhat disappointed to hear that bond markets MIGHT not always follow along in the spirit of the formulaic Hollywood zombie flick (take a moment to process that if you need to...).  In fact the current screenplay is relatively unfinished in that markets haven't given any clear signals as to their next move.  Tuesday looked good for bond bulls, but we quickly retreated to relative neutrality yesterday.  

Still, it IS comforting that Wednesday's trade held that same sideways range as Monday, this time with better volume.  Any more of that and a stronger case will be developing for ratcheting lower under 2.06% as a supportive ceiling in 10yr yields.  Conversely, if today's trading sees 10's break decidedly above 2.06, that's a potentially meaningful break of the trend ("trend" in this case being the supportive ceiling at the 2.06 pivot).  If Friday confirmed such a break, our movie might not have a happy ending.

The cast of characters gets more interesting today in terms of economic reports.  Not only do we get the first major economic release of the week this morning, we get THREE.  Yeah yeah yeah... I know what you're thinking...  "Maybe there are three important pieces of data, but surely, they aren't all happening at the same time..."  Oh but they are!  Ok, let's not overdramatize this...  We're not convinced that markets are destined to respond in grand fashion to this trio of data.  This is simply the week's first real opportunity to see marked reaction to scheduled morning news releases.

The three reports hit at 8:30 and are as follows:

- International Trade, expected to show a $52 bln deficit vs $52.6 bln last time 

- Producer Prices, expected to be rising at a 0.3% rate vs 0.4% last time (core PPI expected unchanged at +0.2%)

- Jobless Claims, seen falling to 355k from last week's 357k 

We make no bones about discounting inflation-related reports in the recent past.  It just hasn't been an issue for quite some time, but seems to be making a small comeback with all the recent hullabaloo over fuel prices.  Even so, markets tend to react to the clearer inflation picture afforded by tomorrow's CPI, if they react at all.  International Trade and Jobless Claims are slightly more interesting, especially the latter if it serves in some way to reiterate the point made by last week's NFP miss.  

Beyond the 8:30am data, there are other parts of the day!  Fed's Dudley (voter) speaks at 715am.  During that same time, we'll also be in the thick of European trading hours, which always stand a chance to be affecting domestic trade these days.  More Fed-Speak at 900am with Lockhart (voter) and Cummings (non-voter) at 10am.  Dudley shows up again at 11am followed by Plosser (non-voter) at 12:30pm.  Finally at 1pm, the 30yr Bond Auction hits.  It's slightly less relevant to MBS than yesterday's 10yr Auction, but considering the 10yr Auction was completely uneventful, 30's will be the most relevant of the week if they elicit much of a response at all.

More from MND:

• MND NewsWire: Consumer Mortgage Choice Act Under Fire From CRL
• MBS Commentary: MBS RECAP: Reminded of Volatility via Friday Cliff-Diving
• Mortgage Rate Watch: Mortgage Rates Jump Back To Recent Highs, More Volatility Ahead
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• MND NewsWire: Senator on a Mission to Change the Way Short Sales Affect Credit Reporting

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