The Day Ahead: Payrolls Anxiety Extends Rates Rally

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Benchmark interest rates inched even lower last night as investors geared up for Friday's nonfarm payrolls report. Bonds have been rallying for four weeks now - on April 11 the 10-year bond yielded 3.57%. 

The benchmark 10-year note is currently +8/32 at 103-19 yielding 3.194% and the 2s/10s portion of the yield curve is 2bps flatter at 262bps wide. In the TBA market, the FNCL 4.5 MBS coupon is +4/32 at 103-07 and the FNCL 4.0 is +5/32 at 100-03.  Yields spreads are wider on the open.

The risk trade is clearly off as both stocks and commodities are in the red.

S&P 500 futures are down 5.0 points to 1,338.- marking its fourth day in the red - while the Dow is 40 points lower at 12,633.  Light crude oil fell 2.18% overnight to $106.86 per barrel, while gold prices fell 0.61% to $1,506.10

"The loss of investor risk appetite largely reflects concern that rising energy costs will slow the U.S. and global economies," said economists at BMO Capital Markets.


Key Events Today:

8:30 - Initial Jobless Claims have been a major disappointment so far in April. The report has posted above-400k levels for the past three weeks, causing the four-week average to jump 15k from the March average, to 408.5k. The last week was the worst, as new claims for unemployment insurance unexpectedly surged 25k to 429k - the highest since Jan. 8. 
Economists anticipate 410k new claims in the week ending April 30.

"Initial jobless claims probably retreated, but remained above 400,000 a fourth week," said economists at Citigroup. "There is a risk that first filings could be dampened during the survey period as a series of catastrophic storms affecting 21 states might delay filings or reporting in seriously effected areas.

" ... Certain states have noted modestly increased filings from the auto and transportation sectors. It is not clear if these are due to intermittent shutdowns of certain Japanese car manufacturers or other factors. On balance, it appears that claims have been little impacted by the global supply chain disruptions, but this could change as key inputs become scarcer in coming months."

8:30 - The first-quarter Productivity & Costs report should back up what we already know from the recent GDP release, which showed the real growth rate falling to 1.8% from 3.1% in the fourth quarter. The productivity numbers may not look good, but they point to job growth in the coming months as companies face the reality of needing more workers to keep productivity rising.

Productivity levels should come in at +1.3% - half the pace of growth in the fourth quarter - while unit labor costs should rise 0.8% versus a 0.6% cutback in the prior quarter.

"The sharp rise in labor productivity growth during 2009 and 2010 is mostly the result of cost cutting," said economists at IHS Global Insight. "This strategy has reached its limit, and in order for companies to expand to meet growing demand, they will need to increase hiring.  As a result, productivity growth is slowing down."

9:30 - Ben Bernanke, chairman of the Fed, speaks at the Chicago Fed's Annual Conference on Bank Structure and Competition in Chicago.

1:15 - Narayana Kocherlakota, president of the Minneapolis Fed, speaks on contingent planning for monetary policy in Santa Barbara, California.