If it seems that each new day brings a new fork in the road for MBS prices that reflects the theme of "waiting for guidance." As discussed, the reconnection between indicators, headlines, and securities prices continues. Whereas there were broad generalities available before and after the recent FOMC announcement, tsy auctions, and overall "rate drama," now that those factors are absent, the market looks to the next best thing for an indication of where we're going. And so it is we turn to earnings and indicators for a measure of how likely it is for the fledgling recovery to shake off its recent hesitation and march forward. As long as this scenario persists, the indecision and the sense of "waiting" in the marketplace will continue to manifest itself on our charts in the form of pauses and other various forms of flirtation at, near, and around "crossroads type" technical levels.
For instance, earlier we discussed three of these levels in MBS, Tsy's, and stocks. For MBS is was our old friend PAR-nertia. For Tsy's, 3.45 (38% retracement) put on a tough show today as a ceiling, and for stocks, it was another 38% retracement, 905, that showed its ceiling flare. So given the rules of the game set forth above, we'd expect to see these numbers hold relatively firm IF the market DID NOT feel that it got enough of an indication to move to it's next stopping points. Indeed the S&P ended at 905, the 10yr Tsy hit it's 3pm close just over 3.45, and relying on the official close of 3pm as a saving grace, MBS were within an eighth of a point of PAR as well. It's hard to know how much credence to give post 3pm trading occasionally as official volume figures cater more to the standard trading hours, but it may be significant that the previous ceiling at 3.45 for the 10YR Tsy, once broken, behaved with technical predictability and acted as a floor for after hours trading. Here's the big picture:
But I don't think you need to obsess too much about the technicals this afternoon. Among the reasons are the relatively important pieces of scheduled data tomorrow, in addition to one of the key phases in this current cycle having yet to play out. The significant data tomorrow: FOMC minutes that will give a deeper look into the announcement that so thoroughly captured our recent attention, and the follow up to today's somewhat surprising PPI numbers in the form of CPI. The big variance in PPI today has some wondering if the previously held notion that "even if producers see inflation, they can't meaningfully pass it on to consumers in an economy that's so rapidly losing jobs," isn't due for a bit of reconsideration.
As far as the "key phase" mentioned, it was already said quite well by AQ in the last post:
NO TREND OR BIAS WILL BE CONFIRMED UNTIL AT LEAST JP MORGAN, BANK OF AMERICA, AND CITI REPORT EARNINGS. Although the yield curve is currently reflecting an outlook for higher rates, the market's gyrations leading up to those releases reflect a repositioning towards a more neutral position. It looks like NYMEX crude prices agree with this outlook as, once again, oil failed to hold gains over $60.
I agree and I think the continuing emergence of technical crossroads on the charts backs it up. Waiting for guidance is still with us. And although I suppose it's a lot nicer to be waiting for guidance with sub 3.5% 10yr's as opposed to crossing our fingers to stay under 4.0%, the lack of clear direction is frustrating. But don't let it frustrate you! Sprinkle this knowledge into your pipeline strategy and adjust accordingly. Times like these favor caution and flexibility, but there are also rewards to be reaped when risk is applied in the situations where it is tolerable. The management challenge of your pipeline is determining which portion merits which strategy.
But if you're past lock cut off today, all strategies are the same going into tomorrow as we're waiting for rates and data regardless. From there, it's always easy to avoid intraday reprices as long as you have a sense of which deals you want to lock if reprices look imminent. And there should be a stratification as well that reserves the smallest portion for the most equivocal reprice warning and a larger portion for more severe market developments. You just make sure you have the "if/then" gameplan ready to go and we'll keep you up to speed on the location of tomorrow's data on the severity spectrum. Hopefully we get to use the Happy Fun Time Spectrum instead! Heck, I'd like to put together some graphics for it anyway.
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