Finally we come to the week we've been eyeing for nearly a month as a candidate for major changes.  It's fitting that 10yr yields ended the previous week right at 2.47% which--above all others--is the poster-child for inflection points for bond markets.  In fact, besides 2011-2013, the last time yields were sustainably below 2.47% was more than 60 years ago.

2014-7-27 tsy range

Why is this week so big?

It's not any one event in particular, but rather a confluence of events and circumstances.  The big-ticket items start on Wednesday with GDP and the FOMC Announcement and culminate in Friday's NFP report.  Thursday adds a wild-card in the form of 'month-end' trading which can create trading motivations that exacerbate or counteract the natural momentum from events/data.

An even bigger wild card could be the market reaction to GDP.  There are several reasons for this:

1. Last time around, the final figure simply ended up falling very far from the initial consensus, making the forecasting of this week's result a sloppier process.

2. The big changes from Inventories also make forecasting a sloppier process and also force investors to account not only for what the report ACTUALLY says about the economy, but also what others might perceive based on inventory distortion.

3. Same story with Q1's Affordable Care adjustments. What did they do and how did they do it? Is it going to be the same in Q2 or will there be a rebound effect?

4. Are market participants as cognizant as they should be about the overall rebound effect that becomes possible simply by virtue of Q1 being so low?

That last point is the scariest. While it's likely not an issue for the most sophisticated investors, a quick flip through financial media channels suggests a certain amount of delusion out there where folks have extrapolated that Q2 could be NEGATIVE simply because Q1 was such a negative surprise. Eeeek! That's dangerous thinking when it comes to the potential bond market response!

Of course, the bigger the negative surprise in Q1, the more POSITIVE the implication is for Q2 because Q2 is the CHANGE from the last quarter. So the worse Q1 is, the better Q2 will be, all things being equal. This becomes an even starker reality the more we assume that inventory changes and ACA adjustments (and heaven forbid, even weather!) distorted Q1.

It means that a somewhat stagnant economy that's just putt-putting along could look downright boomy compared to Q1. With what seems like "too many" educated folks expecting totally crummy numbers this week, any moderate showing risks acting as a big economic surprise; and one that bond markets would not like.

MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
98-19 : +0-00
FNMA 3.5
102-13 : +0-00
FNMA 4.0
105-18 : +0-00
2 YR
0.4959 : +0.0039
10 YR
2.4763 : +0.0073
30 YR
3.2458 : +0.0028
Pricing as of 7/28/14 7:42AMEST

Tomorrow's Economic Calendar
Time Event Period Forecast Prior
Monday, Jul 28
10:00 Pending homes index Jun 103.9
13:00 2-Yr Note Auction (bl)* 29
Tuesday, Jul 29
9:00 CaseShiller 20 yy (% )* May 10.0 10.8
10:00 Consumer confidence * Jul 85.3 85.2
13:00 5-Yr Note Auction (bl)* 35
Wednesday, Jul 30
7:00 Mortgage Market Index w/e 349.4
8:15 ADP National Employment (k)* Jul 230 281
8:30 GDP Advance (%)* Q2 3.0 -2.9
13:00 7-Yr Note Auction (bl)* 29
14:00 FOMC rate decision (%)* N/A
Thursday, Jul 31
8:30 Initial Jobless Claims (k)* w/e 300 284
9:45 Chicago PMI * Jul 63.0 62.6
Friday, Aug 01
8:30 Personal consump real mm (%)* Jun -0.1
8:30 Non-farm payrolls (k)* Jul 235 288
8:30 Private Payrolls (k)* Jul 230 262
8:30 Unemployment rate mm (%)* Jul 6.1 6.1
8:30 Average workweek hrs (hr)* Jul 34.5 34.5
10:00 ISM Manufacturing PMI * Jul 56.0 55.3
10:00 Construction spending (%)* Jun 0.5 0.1