Government Open, Now Let the Data Roll In

Stocks and Mortgage Bonds are both lower so far this morning. Thankfully, the House voted last night on a continued resolution and President Trump stayed late to sign it, reopening the government.

Now that the government is reopened, government workers are back to work, those needing food benefits will be helped, air traffic control can begin to normalize, and economic data will start to flow.

The September Jobs report was ready to be released, but the government shut down two days prior. We anticipate that to be released somewhat soon, and it will be interesting to see if that shows a lot of the weakness we have been seeing in the ancillary reports. The October Jobs Report should really show weakness, as the government workers that were let go were paid through September, and should start to show up as unemployed in the October report.

Someone who is not concerned with the weakness in the labor market is Susan Collins, the Voting Boston Fed President. She said that she does not want to cut rates again for some time, with her main reason being inflation. She believes it's far too high and clearly doesn’t understand some of the factors that are causing an overstatement that we have gone over many times.

Collins said that she is not concerned about the labor market deterioration and that it has not gotten worse since the summer. We are not sure what other signs she would have to see to believe that there has been a significant deterioration. Look no further than yesterday’s weekly ADP employment data, showing 11,250 job losses per week on average over the past four weeks.

Later this afternoon we will hear from Cleveland Fed President, Beth Hammack, who is non-voting but will certainly make comments that will not be Bond friendly and against a rate cut in December.

Some of the nation’s largest lenders/banks, including Bank of America, Wells Fargo, and Morgan Stanley, have been amassing positions in longer-term Treasury/Bonds. They believe these investments will be profitable because they feel rates will be heading lower. While it’s not a guarantee, it’s encouraging to see that a lot of the smart money is thinking that rates will be headed lower.

Later this afternoon at 1:00pm ET there will be a 30-year Bond Auction, which could impact the market, depending on the level of demand. Yesterday’s 10-year Treasury Auction was average, as our own Bill Hagmann graded the auction a “C.” Because it was average, it did not impact the market.

Technical Analysis

Mortgage Bonds continue to trade beneath their 50-day Moving Average, with about 20bp of room until the next floor at 100.71.

The 10-year has broken above its 50-day Moving Average, but is still beneath a nearby critical level at 4.126%, which is the 50% Fibonacci Retracement level.

While there is some room for Bonds to continue to move lower, we feel that patience is key here. With the government now back open, data will begin to flow, and we feel there is a good chance that data will be weak and Bond friendly.