MBS RECAP: Much Sound and Fury; Little Significance

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Today’s focal point was an anticlimactic can-kicking episode wherein the government shutdown was finally ended, but only for 3 weeks.  The passage of the temporary bill was so well telegraphed that markets had plenty of time to start trading it throughout the day.  Stocks and bond yields edged higher, but not in any exceptionally scary way.  After all, this is just a temporary solution and not the kind that engenders much confidence about a permanent solution.

That said, a permanent solution will, of course, have to come.  Today’s temporary solution is evidence that political will can be bent enough to accomplish such things.  I don’t really care which side of the aisle bends when it comes to the market reaction.  A permanent shutdown solution connotes pressure on bonds.  Even the temporary solution could add up to more pressure if overseas markets happen to trade it that way early Monday morning.

Combine that with expectations for a dovish Fed announcement on Wednesday and a downbeat jobs report on Friday, and there is some risk that volatility will pick up next week.  Bullish and bearish cases could be made for both stocks and bonds here.  Traders are doing a great job of staying neutral.  The takeaway is that the economic data and earnings are our best indicators for the next leg of momentum.

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