Good morning readers. Happy "half day" Friday.
The FN 4.5 has held a stable range after a bit of early morning volatility. Currently we are in a holding pattern right in the middle of the recent range...basically flat. MBS trading is super sloooooow....we are at the mercy of the stock lever for the rest of the day.
Here is the two day...
The all important Employment Situation Report is behind us. If you are looking for a breakdown of the data...we posted the STORY.
I used to get all into this report. It is important after all...the health of the labor market IS a driver of consumer spending which fuels our domestic output engines. It seemed like it would make a difference if I gained a better understanding of the factors that were driving the macroeconomy. So I dove deep into data, checking tables in search of any small statistical variances or deviations. I thought it was fun to explore the idea that the BLS might be "cooking the data"....and I WAS GONNA CATCH THEM (haha come on).
After all was said and done...my analysis made for good conversation...but did it really matter?
Maybe. Identifying trends and connecting the implications to the broader economic landscape should be somewhat helpful in forecasting future trading conditions. But...in the here and now, it wasnt doing much to assist me in assisting you.
Eventually I came to the realization that unless the actual results greatly varied from consensus expectations...the market didnt really give a darn. For the most part the data is already baked into prices. Unless a TAPEBOMB hits the wires...business went on as usual for traders!
What really mattered were the specific trading strategies and flows that had been dominating the marketplace.
The moral of the story is...
Reading the headlines is OK....but avoid getting too caught up in nitty gritty details. Here's what really matters...
1. How the market was set up prior to the news
2. How the market reacted to the news
So how did the market react to today's data? Let's look...
The news was pretty much as expected. After spending most of the week illustrating WEAKNESS.....stocks bounced off their lows. You'll see the importance of the red line in a minute, just focus on the bounce for now...
What's important to consider is how the market was set up for the data. The general tone in stocks this week has been negative (see above). Whispers about bank failures and looming correction theories pushed equities to the low side of their month long range. Making things appear worse than they really were was the fact that many participants were out on vacation this week...allowing pessimistic attitudes to pick up momentum and generate greater price volatility.
All in all...sentiment was sour on stocks all week...so when the data came in "as expected"...market participants took back a portion of that "sour sentiment" discount. When you look at the big picture its not all that big of a deal though...the "DIDNT GIVE A DARN" reaction is more obvious.
In the rates market the reaction was opposite. Lots of PANICKY CHOPITILITY (volatility). What's good for stocks was bad for bonds. The 10yr yield ticked higher. Eh..the 10 yr yield has ticked higher since yesterday's close though...
Just as we did with stocks, we will do with bonds....
What's important to consider is how the market was set up for the data. The general tone in bonds has been positive lately. The fixed income market has essentially ignored all thats gone on around it....rallying August away. This week, stocks showed more signs of weakness and the 10y yield tested summertime lows...leading "rate sheet influential" MBS to summer price highs. Heading into September it appeared that seasonal influences were starting to show up in stocks...and the bond market was reflecting it. However, when data came in "as expected" this morning...market participants did a bit of correction (which really started last night).
Oh noo...should we panic? Nah...stay cool, calm, and collected. The market just took back a portion of the "flight to safety" premium that was priced in before the data (remember stocks had too much discount priced in...that was taken back. Bonds had too much premium priced in...that was taken back too. FLIP FLOP).
When you look at the big picture its really not that big of a deal..the "DIDNT GIVE A DARN" reaction is more obvious.
Make sense?
For the rest of the day...
STAY CAUTIOUS. Speculative and protective positioning will take/has taken place early in the session. Around lunchtime market participants will slowly begin to migrate towards the exits. This means PANICKY CHOPITILITY may become a concern as liquidity dries up...but the range should govern any gains and losses.
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