Last Week

- Bond Markets built on previous week's post-FOMC bounce

- Best levels seen around noon on Tuesday, weakness followed

- Majority of weakness seen Wednesday after Economic data

- Markets closed on Thursday, then a quiet, sideways half-day on Friday

This Week

- Significant economic data on calendar, high market-moving potential

- ISM Manufacturing on Monday, then Tuesday is quiet

- Lots of important data on Wednesday, starting with ADP Employment

- GDP (2nd Q3 reading) on Thursday, and all-important Employment Situation (NFP) on Friday

- NFP is even more important than normal due to immediate QE implications 2 weeks from now

Strategy

After last week's Thanksgiving holiday and bond market closures cast some doubt as to whether or not we should put much stock in MBS weakness, this week's busy calendar of significant data more than makes up for it.  By the end of the week, we will have seen several of the most relevant market movers in terms of economic data, culminating in the king of market movers on Friday: The Employment Situation Report (aka "NFP," or "jobs report"). 

NFP always has the potential to send MBS quickly in either direction, but this one is even more important than normal.  The reason goes back to the last report, which came in much stronger than expected, ending a 2-3 month slide in job creation.  That slide had most market participants pushing the date back by which they saw the Fed beginning to reduce asset purchases.  The most recent report undid a lot of that complacency.  Almost overnight, the notion of that the Fed might taper in December was acceptable conversation yet again. 

Now this week, if the economic data comes in acceptably strong and most importantly, if NFP confirms the bounce back seen in the last report, December tapering will even more possible.  Many investors will see it as probable, in some form.  This would very likely test the recent limits of weakness for MBS and Treasuries.  The very relevant counterpoint is that 10yr yields near 3% were seen as a growth-prohibitive environment among the FOMC in September, so there may be some doubt as to how aggressive they'd be with rates already over 2.75%.

The week begins with just one heavy-hitting report in the form of ISM Manufacturing.  Tuesday has no major data, but then it's game-on from Wednesday through the end of the week.  Last week left the technical read on rates as "negative until proven otherwise."  Whatever happens during the first four days, however, can be just as easily undone by Friday's jobs report. 

Charts

Treasury technicals mentioned above: "negative until proven otherwise."

Some relevant pivot points for Treasuries.  Note the gravitational pull exerted by 2.75 this past week.  This is one of the most significant longer-term inflection points for 10yr yields.