Yesterday

- MBS outperformed Treasuries, but both were generally flat, and slightly stronger

- Factory Orders data was a non-event

- Plenty of Fed Speakers, but nothing new: taper depends on data

- Key Exception was Rosengren, saying April taper is no big deal vs December

Today

- ISM Non-Manufacturing report at 10am--The only heavy hitter from Mon-Wed

- Some similarities and differences compared with ISM Manufacturing last week

- Trend over next 3 days could be set by a big enough beat or miss

- Not much else on tap apart from two Fed speakers, but both too late in the day to matter

Strategy

Like its sister report last week, today's ISM Non-Manufacturing data doesn't always move markets, but also like its sister report, it can cause fairly brisk movement when it deviates enough from expectations.  That's great...  So what's "enough?" 

Last week's ISM data was a bit of an anomaly inasmuch as a fairly tame 'beat' resulted in less-than-tame selling pressure in bond markets (56.4 vs 55.0 forecast).  There have been times where such a discrepancy would scarcely move the needle, but there were two complicating factors this time.

First, trading levels in bond markets had been fairly flat and potentially entering into a temporary selling trend based on technicals.  In other words, if we completely shut off the flow of news and data, MBS may well have moved lower in price to end the week purely based on math n' junk. 

Second, the effects of the government shutdown were as yet, unknown, considering we'd seen only a few pieces of data from October by that time.  It was fair to expect 2-3 weeks of fiscal frustration to take a toll on economic metrics, but instead both the Chicago PMI and ISM PMIs were higher than expectations and previous readings.  The suggestion of resilience combined with the technical tripwire made things worse than they otherwise would be.

Today, we're not quite in the same spot in terms of technical analysis as we were last week.  Several of the bearish trends are already mature enough that they could be challenged.  That's the scenario that may play out if ISM is appreciably weaker than expected.  It doesn't take too much to be appreciably weaker either, considering that merely hitting the forecast would make for the 4th weakest report since early 2012.

As far as stronger results are concerned, there's probably not as much pain in store with the same sort of moderate improvement seen in the Manufacturing data, but only to a point.  Anything over 56.0 would be the second highest reading since the end of 2010, and likely enough to make yesterday look like a quick pause for reflection before getting back to the task of working through the selling trend in bond markets in time for NFP Friday.

Charts

Last week's ISM Manufacturing PMI (or just "PMI") and today's Non-Manufacturing PMI ("NMI").  Orange lines are 12-month moving averages in order to show how PMI coming in better than forecast was more impressive than it would be fore NMI to do the same today.  Hopefully that would help temper the reaction to strong data.  Red circles show the forecast values.