The running consensus on when we'd see the first actual reduction in Fed asset purchases--provided economic conditions don't change enough to preclude it--is for the September FOMC Announcement.  Part of the reasoning has to do with the fact that this is the next announcement with the accompanying Bernanke press conference and economic forecasts (July's announcement is just "the announcement").  One of the other considerations is that off staffing and liquidity.  This is a bit of paradigm shift for the average loan originator, but in essence, the fact that markets are made and traded by human beings means that summer months more frequently see 'skeleton crews' on trade desks.

With the general hype about 'black box' trading and even the simple concept of the modern electronic marketplace, it's easy to assume that markets function normally regardless of how many traders show up.  They don't.  People matter--especially in MBS markets.  As evil as Wall Street is portrayed, it's actually staffed by some surprisingly regular people with kids and families.  Believe it or not, these folks like to take vacations some time, and their seasonal migratory patterns generally follow the same rules as everyone else when it comes to choosing the time of the year to take some time off work.

This concept is important for two reasons this week.  Most obviously, the 4th of July is on Thursday.  Markets will be fully closed (and will close early on Wednesday), but will be open again on Friday.  Who wants to work on a Friday after a day and a half off?  Many of us will be working, of course, but across the country, you can be sure that Friday the 5th will rank right up there in terms of non-holiday absences.  After all, not only is it the middle of summer, but fireworks tend to push back the average bed time.  Very few holiday scenarios are more compelling than only having to miss one  day of work in order to have a 4.5 day weekend in the summertime.

The less obvious reason that the holiday concept is important is that, just as there is a "vacation season," that decidedly begins after Memorial Day before hitting full swing in the summer, so too is there a clear-cut termination of that season.  There's even a holiday to celebrate 'working' (Labor Day) to bookend the season, just in case there was any doubt.  In other words, right after the first Monday in September, it's time to get back to work!  In fact, Bernanke was even asked about tapering prospects specifically in relation to Labor Day at his Congressional testimony in late May.  It might have seemed like a weird choice of time measurement, but Congressman Brady was probably just thinking "yeah, because whenever you guys actually do start tapering asset purchases, everyone will probably want to be around for that."

And so it came to be that the "Septemberists" (which is most everyone) honed in on the September Fed meeting as the soonest possible taper target.  The reasoning is compelling--more time for the economics to prove themselves out, more liquidity in the marketplace to smooth out potential volatility, more  opportunity for Bernanke to mold expectations in the press conference, and additional layers of information in the member forecasts--but there is a potential problem.  Friday is Nonfarm Payrolls, and every one of the payrolls reports will be even more critically important than it already was.

NFP, and indeed the broader Employment Situation Report, is perhaps at its apex of market-moving significance given the fact that it's seen as the single most important report in determining the deceleration schedule of Fed asset purchases.  One horrible NFP could easily push back tapering expectations, and when we're talking about a consensus of $20 billion / month for at least 2 months, that takes the Jobs report to a new level. 

To that end, this Friday stands a chance to be rather extreme to whatever extent the actual numbers deviate from the consensus.  Markets won't be able to help the fact that staffing will be light, and this suggests higher volatility, all things being equal.  Still, the interplay between the vacation season and the implicit importance of this NFP remains a bit of a mystery.  Thankfully, Wednesday's full batch of data will help us get a feel for how reactive markets might be feeling.  We may see unfinished battles set to pick up on Friday morning, or we may see the chips sorted for the weekend (falling open interest, closing positions, snowball price movements in the event of exceptionally strong/week ADP employment that aligns with the other data).

Even before Wednesday, markets waste no time in getting down to the business of sorting through economic data.  Both major manufacturing PMIs will be released, as well as Construction Spending.  None of these are watershed moments for bond markets, but traders might give an extra glance at the employment components of the Manufacturing indices.  Tuesday is fairly slow, with only Factory Orders by way of data.  Wednesday explodes with several key reports offering last minute adjustment potential for Friday's NFP.  Though NFP survey week was  earlier in June, weekly Jobless Claims will also be out on Wednesday, due to the holiday.  Markets will close early (2pm) and then be fully closed on Thursday.  Friday's focus is entirely on the jobs data at 8:30am.