Update 5/6/10
Risks favor: Locking Ahead of Tomorrow’s Jobs Report
Current Price of FNMA 4.5% Bond: $101.12, +3bp
Bonds started the day to the upside but in an already volatile session, are now trading near unchanged after stepping into negative territory. The erratic behavior of the Bond market is understandable, with many opposing forces tugging at Bonds from both directions. The latest push higher for Bonds has been fueled by a Stock market selloff, where investors are parking the sale proceeds into Bond instruments. Additionally, the US is being viewed as a safer place to invest than Europe , which is evidenced by the Euro hitting a 14 month low against the Dollar. The situation in Greece has reached very troublesome levels, with riots and deaths now grabbing the headlines, as public workers do not want to accept some of the cutbacks needed to help Greece get on firmer economic footing, which is also a conditional requirement for the ECB and IMF’s bailout. But on the other side of the trade is the sentiment that the economy is improving, US debt is soaring, and rates will certainly be on the rise. This makes for a very difficult trading environment, as important headlines like today’s Initial Jobless Claims do not result in normal market reactions.
Speaking of Initial Jobless Claims, they were reported this morning at 444,000, a touch above the 440,000 expected. Continuing Claims, or individuals receiving unemployment benefits lasting up to 26 weeks, fell by 59,000 to 4.6M. But those who have maxed out their Continuing Claims benefits can claim emergency benefits (Emergency Unemployment Compensation), which can extend them to a total of 99 weeks of benefits. The number of individuals that fall into that category is a staggering 5.3M, an increase of 154,000 from the prior week.
Productivity in the First Quarter rose 3.6%, better than the 2.4% that was expected. The rise was the smallest gain in a year and comes after a 6.3% gain in the Fourth Quarter of 2009. It is not surprising to see a big fall off in productivity as the last quarter’s scorching 6.3% rise came off of very low levels.
The latest Treasury auction amounts were announced yesterday, but the size was trimmed from the first quarter. The government will sell $38B 3-Year T-Notes on Tuesday, $24B in 10-Years on Wednesday, and $16B in 30-Year Bonds on Thursday. This will make for some interesting and volatile market activity next week.
The European Central Bank left its benchmark interest rate at 1% as the debt problems in Europe intensify. As we mentioned earlier, the ongoing problems in Europe have supported the US Bond Market.
Jobs Report Strategy
There is a lot of evidence that the economy is improving, and while the labor market is still weak, it appears to also be improving. The consensus for tomorrow’s Jobs Report is for 187,000 new jobs to be created, with an Unemployment Rate holding steady at 9.7%. We think the stage may be set for a slightly better number than forecast, and with Bonds in overbought territory, they are ripe for a sell-off on a good number.
If the Jobs number is below expectations, Bonds will get a modest boost…but a Jobs number that beats expectations could send prices much lower quickly, from their present levels. This is why we are advising to Lock in advance of tomorrow’s Jobs number.