Yesterday

- MBS continue to lag Treasuries, but closed higher than Monday

- Building Permits data much stronger, but all due to Multi-Family

- Case Shiller Home Prices beat forecast, but gains decelerate

- Weak Consumer Confidence but decent employment metrics

- All in all, a day of "buts" that resulted in flat MBS

Today

- Busiest day of the week for data and events

- Durable Goods, Chicago PMI, Consumer Sentiment... All potential market movers

- Slightly less attention being paid to Jobless Claims at the moment (seasonality factor)

- Traders' preference would be an orderly escape to the extended weekend

- Month-End trading is more in play today than during Friday's shortened session

Strategy

Despite the term "extended weekend" being thrown around a bit, bond markets are open for a half day on Friday.  While that technically makes it the last day of the month, there are all kinds of reasons that today will be just as much of a "month-end" session, if not more so.  In fact, some of the seemingly incongruous movement between data, Treasuries, and MBS is likely due to the month-end tradeflow considerations.  With light liquidity ruling the week, it makes good sense for traders to do what they need to do while there are relatively more counterparties around to take the other side of the trade.

Beyond those phantom forces that may or may not be pushing in either direction, there are the regular technical and fundamental considerations.  On the fundamental side, Jobless Claims is forgettable as it's not an NFP survey week and is also more heavily discounted during the holiday season.  Durable Goods are seen making a pretty big swing lower from 3.8 to -1.9 and with that sort of distance to travel, the door is open for a bigger beat/miss to catch more investors offsides. 

The highlight of the morning, however, is the data duo at 9:45 and 9:55, Chicago PMI and Consumer Sentiment.  Of the two, Chicago PMI tends to pack a bigger punch, but said punch would likely wait for confirmation or rejection from Sentiment 10 minutes later before getting too punchy.  Even then, technicals could be just as potent.  They seem to be guiding the week for Treasuries so far (see chart below), though they may be close to running their current course and thus facing a decision to bounce or proceed.  Whatever path is chosen, the best bet is that it will be inconsequential compared to the fork in the road we come to with next Friday's NFP.

Charts

Here is Friday's Treasury technicals chart where we began to consider a correction to the FOMC Minutes-related weakness.

Here's the updated version

Treasury technicals are all well and good, and they continue to do a better job of serving as a barometer for broad scale interest rate momentum, but MBS have definitely fallen off the short-term wagon.  This divergence is probably, hopefully just something to keep in mind for this illiquid holiday week, and even then, only amounts to an adjustment of perception.  What should that perception be adjusted to?  I'm not sure.  This MBS weakness relative to Treasuries either means that they'll be the first to move into weaker territory if the data suggests it, or that they will be better able to hold their ground because they haven't really gained much.  I'm leaning toward the latter in the case of weakness (in other words, if Treasuries and MBS are losing ground, MBS will probably lose less).