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Best Levels in Weeks Ahead of High Stakes Jobs Report

Rather than circle the wagons and consolidate the recent rally, bonds kicked the buying into higher gear on Tuesday thanks to a surprisingly weak Retail Sales report for December. This can be added to the list of recent data that has urged the bond market to get in position for a similarly weak jobs report tomorrow. Nearly 15bps of improvement in less than a week means that jobs would have to especially downbeat for this pace to continue. If the report surprises to the upside, bonds are at risk of a reasonably brisk correction, but as always, the scope of potential volatility depends on the deviation from the median forecast.

Econ Data / Events

Employment costsQ4

0.7% vs 0.8% f’cast, 0.8% prev

Import prices mm (Dec)

0.1% vs 0.1% f’cast, — prev

Retail Sales (Dec)

0% vs 0.4% f’cast, 0.6% prev

Retail Sales Control Group MoM (Dec)

-0.1% vs 0.4% f’cast, 0.4% prev

Market Movement Recap

09:03 AM Gradually stronger overnight with additional gains after 8:30am data. 10yr down 5bps at 4.157 and MBS up 2 ticks (.06).

11:15 AM Additional gains. MBS up an eighth of a point and 10yr down 7.3bps at 4.135

01:10 PM off the best levels, but still stronger. MBS up 3 ticks (.09) and 10yre down 5.9bps at 4.149

02:55 PM Drifting sideways into the close with MBS up 2 ticks (.06) and 10yr yields down 6.1bps at 4.147

Mortgage rates fell on Tuesday following a downbeat Retail Sales report. At 0.05%, it was the largest single-day drop since the uncommonly big 0.15% drop on January 9th. This also takes the average 30yr fixed rate to 6.11%, easily below its recently narrow range of 6.15-6.20. The bonds that drive mortgage rates are always tuned in to various economic reports for movement cues. Weaker data = lower rates, all else equal. Retail Sales is hit and miss when it comes to causing rate volatility. The undisputed champion among economic reports is tomorrow’s jobs report at 8:30am ET. Several recent rate rallies have been slightly larger than they otherwise might have been because the market may be positioning for a downbeat jobs number. If it is weaker than expected, there’s certainly room for the rate rally to continue, but if the report shows resilience, rates would likely bounce back higher.

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Last Thursday, we discussed the paradox of a rally in the present moment being driven by future data. More specifically, the three downbeat labor market reports increased the stakes for tomorrow’s jobs report. Depending on trends and trading positions, risks can be asymmetrical. A trader who expected higher rates might have only seen a modest increase in yields if the data was stronger, and a bigger decrease in yields if the data was weaker. The market already rejected a break above 4.30% in the 10yr. Then multiple reports suggested additional buying and additional risk of a weak jobs report. The choice to move back toward a familiar recent range (4.1-4.2) became clear with this morning’s weak retail sales data.  Just be aware that if Wednesday’s jobs report is stronger, yields could pop right back over 4.20.

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