The Week Ahead: Exceptionally Light Calendar. Headline-Driven Volatility. FOMC Minutes

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If markets weren’t so busy trying to convince us that interest rates hit their final iteration of all-time lows in late July, the week ahead would be a complete non-event.  As it stands, it’s made interesting simply by the fact that rates just undid 4 months of progress in 3 weeks, rising all the way back to the lower end of their long running range from November 2011 to March 2012.

This week, we could very easily find that this fast-paced correction of the past 3 weeks has been another glorious head-fake in the same vein as mid March or late October.  The only major problem we have with drawing comparisons between now and then is that the recent sell-off was significantly more methodical and plodding, occurring over weeks vs the mere days of the others.

That gives us the impression that there’s a certain level of determination behind the recent push higher in rates.  Whether or not that’s “real” and lasting or simply a determination to run things as far as possible in the other direction before market participants and European leaders get back from prime-time vacation season, remains to be seen.

Very likely, we’ve been dealing with not one, but several overlapping factors including, but not limited to:

– The seasonality issues just mentioned

– The repricing of QE3 likelihood at the September meeting

– Possibly ACTUAL repricing of Euro-zone risk following Draghi’s London speech and some small turning of cogs

– The fact that cogs can actually be perceived to be turning because no Euro zone leaders have been around to argue with each other about it

– Technical and tradeflow-driven correction that either proves to be set-up for the next leg down in rates or a head-start for a more serious sell-off

Whatever the chain of causality might be, it’s certainly created some “hype” that’s been negative for MBS Prices.  We wrote more about that here: Looking For Hype Sellers Over Hype Buyers. 

As far as encountering anything likely to resolve the question of how much hype is fueling the recent move higher in rates, this week offers essentially no information.  The only notable item on the economic calendar is the FOMC minutes from the 8/1 meeting.  It’s not that we’d expect FOMC minutes to offer any new information, but if markets infer any additional leanings for or against a QE3 announcement at the September meeting, at least we’ll get to see how much this factor deserves to be in the list above.

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