The economic calendar is empty and the bond market feels sorta stale
today. This is no surprise given the importance of events to take place
in the days ahead.
President Obama will give the State of the Union address tomorrow
night and the FOMC will release their first policy statement of 2011 on
Wednesday afternoon. Both items carry enough weight to break the recent
range but we're not sure which ones more important at this point in the
so called recovery process.
Given the "just gotta get by" attitude of Main Streeters, we're more
inclined to give the State of the Union address a "here and now"
advantage over the often times unchanged FOMC statement. Putting aside
political bickering in the "here and now" seems like it would do more to
bolster confidence on both Main Street and Wall Street. Unfortunately the prospects for such a shift in sentiment are likely to be short
lived as even the most aggressive Pom-Pomming from President Obama will
only go so far in the eyes of skeptics. Still, acknowledging our weaknesses
and outlining a concrete plan to address them is the first phase of avoiding
another negative feedback loop in financial markets. We're talking high
unemployment rates, State and Federal budget deficits, (a lack of) GSE
Reform, Chinese trade wars, rising energy prices, and the general air of
uncertainty that continues to surround the entire
social-political-economic environment....just to name a few. President
Obama has A LOT of issues to address and a much larger audience to
appease.
On the other side of the coin we've got the FOMC statement on Wednesday afternoon. A status quo
message is expected and new forward looking guidance will probably be
minimal. So from that perspective we'd be watching for an "eh, nothing
new, recovery inching along" FOMC statement on Wednesday. But that gets us thinking...maybe
we're too comfortable with status quo? The Fed's rhetorical powers are at full capacity when we least expect them to be. With a status quo sentiment in place, we can't overlook the potential for an FOMC tapebomb, especially with three new hawkishly biased board members casting their votes in 2011(Fisher, Evans, Plosser).
This might not be an intention of the Fed but the market does what it
wants when it wants, so even the slightest upgrade or verbiage update
might be leaned on as a directional guidance giver/excuse to trade
outside the recent range in "rate sheet influential" benchmarks and MBS coupons.
Of course we could just be conjuring up the concoction we feel is
necessary to wake the bond market from its sideways slumber, that tends
to happen when you bounce back and forth between the same two points for
over a month. Ben Franklin's overused comment fits well
here...."Insanity is doing the same thing over and over and expecting
different results"
The politics of money and banking aside....if these two events fail
to spark some shift in investment bias, there's always more range to be
played, we're just not sure how much room is left to be played!
In 10s that range is 3.30% to 3.50% with outlier attempts at 3.25%
and 3.57% not out of the question. When we say "not sure how much room is left to be played", we're calling attention to the bear flag continuation/consolidation pattern currently in
progress in 10 yr TSY yields (would be bullish if it was a price chart
and not a yield chart).
Technically speaking this chart pattern implies
higher rates hang over our heads. Fundamentally speaking we continue to
grind on a record number of long term unemployed, a GSE Reform-less
housing market that is devoid of demand, and the great margin squeeze of
2011 where higher energy prices will only lead to less hiring and less
consumer spending. The bond market must make a choice soon...focus on the technicals or focus on the fundamentals....because
the bear flag is running out of room to consolidate and stored energy
will be released outside the range eventually.
BEAR FLAG = BAD FOR MORTGAGE RATES!
The
clock is ticking and consolidation continues. Much energy has been
stored for the day the range officially runs of room. It's only a matter of time
before this stored energy explodes in a directional manner. The bear
flag says that direction will not be friendly to mortgage rates, our
fundamental storyline says otherwise. The bond market will be forced to focus on one or another soon enough....
MOST IMPORTANTLY...
Today is MG's 31st Birthday. To celebrate I want to share a few of my favorite MG posts.
- Grand Unified Theory of Floating or Locking Origination Pipelines: THE GUTFLOP
- MND Special Report on MBS "Black Wednesday:" Among The Worst Day Of Losses.... Ever....
- MBS UPDATE: Return Of A Fabled Creature? Are you still chasing the dragon?
Please share your best wishes and favorite MG posts in the comments section below....