The Day Ahead: Second to Last Chance


Bond market momentum is increasingly dictated by horse races between September and December
timelines for the announcement that the Fed’s asset purchases will begin decelerating.
September 18th and December 18th are the next two instances of FOMC Announcements that include
a Bernanke Press Conference and the staff economic projections. The last instance of the Fed
Minutes confirmed what market participants had already assumed: that the committee leans on
the press conference as a venue for refining the delivery of tricky monetary policy changes.

More simply put, tapering is only though to be eligible for a 2013 announcement on one of these two Fed
days. Therein lies the horse race. If the consensus shifts toward December, bond markets ebb toward
the stronger end of their post-June-FOMC range and vice versa when it shifts back toward
November.  Yesterday was one of those “shifting back toward November,” days.   Really, the horse race can be reduced to “November: yes or no?” To whatever
extent the answer is “yes,” we push the upper rates boundaries.  

More than anything else, the Nonfarm Payrolls reports will inform the Fed’s decision.  That has been reinforced since the last instance of NFP where nothing else came close in terms of volume or volatility as this Wednesday, and this could have had as much to do with ADP as anything (in that it’s designed to predict NFP and has done a better job at that since it’s reworking AND because NFP is extra important).

Today is the second to last NFP before the Fed’s first window to announce ‘tapering.’  If they’re both in this same 200k range, markets will likely assume the September 18th horse wins the race, and this will likely solidify a shift in the 2 year linear regression in the chart below.  It’s starting point is August 2011’s NFP day–the highest volume day of that year and the official entry point into the lowest, narrowest range in the history of 10yr Treasuries.  Drawing a regression line out from that day to ANY point in the future had always returned a downwardly sloped line, until yesterday, when it turned flat for the first time.  Now, today’s 2yr NFP Anniversary will decide if it slopes up for the first time ever or keeps hope alive for a while longer.

(actually, hope doesn’t look very alive unless 10’s manage to get back below the 2.4’s.  The economy is going to have to take an extended turn from it’s tepid, underwhelming growth for that to happen–probably).

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