Leveling the Playing Field September 2, 2014

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For years Ive been asking myself, How many basis points is the word invasion
worth? Turns out its about 7bps if you are talking about a global superpower attacking
an eastern bloc country.

The week was relatively tame until Wednesday morning, when we awoke to news that
Ukrainian President Poroshenko was cited as saying Russia was invading Ukraine.
Newswires corrected the story, saying instead that Russian troops had entered Ukraine.
This temporarily calmed markets while Poroshenko called an emergency security and
defense council meeting where he in no way sounded completely prompted by outside
forces. Im not even going to bother looking for the exact quote, but it was basically
Russian troops were trying to rescue their comrades following a Ukrainian butt
kicking.

This stopped the downward spiral of interest rates following the typical flight to safety
and everyone basically pressed pause to await further developments. Equity markets
continued to behave like your perpetually bubbly (and kinda dumb) friend that seems to
be ignorant of anything negative going on in the world, with the S&P cracking 2k for the
first time. The EU expressed concern and the UK raised its threat level.

The bottom line is that yields pushed to technical support levels, such as 2.33% on the
10yr Treasury. These levels will provide resistance against all but the most catastrophic
data prints (eg horrible job data Friday), so we are unlikely to push lower without the
help of escalation in Ukraine. But if Russia ramps up military activities or if Putin rides a
horse bareback and shirtless across the border, risk off will be in full effect.

That means data like GDP (0.2% stronger than previously expected) and corporate profits
(huge swing up to $154B last quarter) are being completely overshadowed by global
concerns.

With all eyes on Russia, the impact of this weeks heavy data calendar will be somewhat
muted. At a minimum, these concerns are keeping a lid on interest rates and we are
unlikely to experience a jump in rates in the near term even if data comes in strong.










Heres what we think it would take for three rate scenarios to play out this week.


Rates Move 10bps + Higher
News in the Ukraine suggests stabilization/improvement AND domestic data comes in
strong. Strong domestic data alone will NOT push the 10yr Treasury into the 2.40%s.
Markets react favorably to Penn States dramatic come from behind win over the 5
th
best
football school in Florida.

Rates Stay in the Same Range
This is probably the most likely scenario. No escalation in Ukraine, but no resolution,
either. We may get increased rhetoric around sanctions. Domestic data is overshadowed
and rendered largely irrelevant for now.

Rates Move 10 + Lower
Escalation in Ukraine OR more of the same coupled with weak US data.


Bottom line a very full economic calendar, headlined by Fridays labor reports and a
very full Fed calendar of speakers, will only carry as much significance as the events in
Ukraine will allow. Just like the classic logic statement, If Ukraine, then X.






Economic Data
Day Time Report Forecast Previous
Tuesday 9:45AM Markit US Manufacturing PMI - 58.0
10:00AM ISM Manufacturing 56.9 57.1
10:00AM ISM Prices Paid 59.0 59.5
10:00AM Construction Spending MoM 0.80% -1.80%
Wednesday 7:00AM MBA Mortgage Applications - 2.80%
10:00AM Factory Orders 10.70% 1.10%
Thursday 8:15AM ADP Employment Change 213K 218K
8:30AM Trade Balance -$42.5B -$41.5B
8:30AM Initial Jobless Claims - 298K
8:30AM Continuing Claims - 2527K
8:30AM Nonfarm Productivity 2.50% 2.50%
8:30AM Unit Labor Costs 0.60% 0.60%
9:45AM Markit US Services PMI - 58.5
9:45AM Markit US Composite PMI - 58.8
10:00AM ISM Non-Manf. Composite 57.2 58.7
Friday 8:30AM Change in Non-Farm Payrolls 220K 209K
8:30AM Change in Private Payrolls 200K 198K
8:30AM Change in Manufacturing Payrolls 20K 28K
8:30AM Unemployment Rate 6.10% 6.20%
8:30AM Underemployment Rate - 12.20%
8:30AM Average Hourly Earnings MoM 0.20% 0.00%
8:30AM Average Hourly Earnings YoY 2.10% 2.00%
8:30AM Average Weekly Hours All Employment 34.5 34.5
Speeches and Events
Day Time Report Place
Wednesday 2:00PM US Federal Reserve Releases Beige Book Kansas City
Thursday 12:00AM Fed's Powell Speaks New York, NY
12:30PM Fed's Mester Speaks on Monetary Policy Pittsburgh, PA
8:15PM Fed's Fisher Speaks Dallas, TX
9:00PM Fed's Kocherlakota Speaks Helena, MT
Friday 3:45PM Fed's Rosengren Speaks Boston, MA
Treasury Auctions

Day Time Report Size
None


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