Next week may be rather quiet for trading volume but has the makings of extreme volatility.
So what’s in store? First, it’s a holiday-shortened week. Both the stock market and bond
markets are closed on Friday, plus the MBS market closes at 2:00EDT on Thursday. This means the majority of bond traders are gone after Wednesday's close, enjoying an early start to the long holiday weekend. This could cause some huge swings in pricing because you have the powerful combination of fewer traders and less volume with very important economic data such as Non-Farm Payrolls (released on Thursday 7/3 because of the holiday).
The entire week is packed with big time reports. In the manufacturing arena we have Chicago PMI, ISM Manufacturing and Factory Orders. These reports will contain inflationary data as well as labor demand.
We also have a large supply of labor related releases with ADP Private Payrolls, Initial Jobless Claims, Challenger Job Cuts, Non-Farm Payrolls and the Unemployment rate.
Additionally, we have some general macro-economic releases like Pending Home Sales, Construction Spending and ISM Services (2/3 of our economy).
There’s plenty for traders to digest next week. The key will be if we continue to see very good growth in the manufacturing sector and whether or not the lagging labor market will show some improvement.
But with the skeleton crew of bond traders, we could see come wild swings on Wednesday and Thursday due to low volumes.
Our 2014 high for our benchmark Agency Fannie Mae 3.50 coupon was on May 28th with a closing price of 103.18, our price as of 06/27/14 1:20EST is 102.77. So your upside is likely a maximum of only +41BPS. Even this would take a big miss on several reports including Non-Farm Payrolls. 1st QTR GDP aside, we have been getting steady readings above 200K for NFP and very strong manufacturing readings lately.
Our lows since we reached our 2014 occurred on June 17th with a close of 101.70 so the potential downside looks like -107 BPS with strong NFP data.
Things could be quiet, but given the positive run we’ve enjoyed it could be argued there’s more to lose than gain.
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Sr. Bond Analyst