The Day Ahead: Employment Situation and ISM Non-Manufacturing

Benchmark yields moved mostly sideways overnight but have ticked higher over the last hour as investors await the all-important jobs report for November. 

5, 7, and 10-year Treasury yields are all up 3-4bps. The 10-year note is currently -10/32 at 96-16 yielding 3.035%. Weakness in the belly of the yield curve has led "rate sheet influential" MBS prices lower. The FNCL 4.0 is 12/32 at 99-23.

Stock futures are mostly flat. S&P 500 futures are +1.75 at 1,224.50 and Dow futures are 6 points higher at 11,369. Equities have been rallying in the past few days ― the Dow is up 2.44% since Monday, more than erasing the 1.01% loss in November. Commodity prices are modest higher. Light crude oil is 0.13% up at $88.11 per barrel, while gold prices are up 0.15% at $1,391.40.

While sentiment remains skittish due to sovereign debt concerns in Europe, some overseas data earlier today was encouraging. The Eurozone services PMI was revised up to 55.4 in November from 53.3 a month before; the region’s retailers had a better than expected month; and Eurozone retail sales rose 0.5% in October, erasing September’s decline, according to economists at BMO Capital Markets.

Key Events Today:

8:30 ― The October employment report showed Nonfarm Payrolls rise 151,000 in the month, a number that solidly beat expectations as the index climbed for the first time in five months. Private job growth was 159,000, the largest gain in six months and the 10th straight gain. In November, another 140k jobs are to be added to the economy, including 150k private jobs and 5k manufacturing jobs.

“Available indicators suggest the November Employment Report should extend the improving trend evident in last month's release, including revised GDP, retail sales and manufacturing industrial production,” said economists at Nomura. They cited the jobs components of the Philly Fed and Empire State manufacturing surveys, which remained well-above their break-even levels. Of course, the four-week average of initial jobless claims is also extremely encouraging. 

“We think the bulk of job gains will come from service-providing sectors, including retail trade, transportation, professional and business services, and health and education,” they added.

The better than expected gain of 93k private jobs in Wednesday’s ADP report adds some upside risk to the report.

The Unemployment Rate is anticipated to remain stuck at 9.6%.

“It will likely take some time before the unemployment rate declines meaningfully, as a probable return of discouraged job seekers to the labor force will lift the participation rate from its current quarter-century low,” said economists at BMO Capital Markets. “The economy needs to grow consistently faster than 2.25%, according to Chairman Bernanke, to reduce the jobless rate, and we don’t see that happening until the back-half of next year.”

10:00 ― The influence of the ISM Non-Manufacturing Index will be limited this month given that it follows the employment report. The index covers the services, financial, and construction industries, and is expected to grow at 54.8 in November, half a point better than a month before.

“Freight volumes continued to increase, consumer spending trends are improving, and manufacturing activity indicators overall continue to be constructive,” said economists at IHS Global Insight. “We expect less of a positive push from the financial sector, and the growth of new orders could also fall back by a couple of notches, so those headwinds should restrain the gain to about a point.”

OTHER EVENTS...

10:15 ― QEII Fed open market purchase of $6-8 billion Treasury  notes maturing between  6/15/13-11/30/14.