The Day Ahead: All About Jobs Report

What a difference silence from Europe makes!  After Italy announced that it would be a good 10 days before we heard anything from the 10 wise men (read more...), domestic markets have gone into a catatonic trance, utterly focused on today's Non-Farm Payrolls number, and the various tradeflow considerations that go with it.  Specifically, the somewhat precipitous movement in a positive direction for bond markets this week has come about from a nearly ideal combination of pre-NFP adjustments, snowball buying in broader bond markets, and spread tightening in MBS.  Let's break those down...

Pre-NFP Adjustments.

This is fairly straightforward and something that we've seen on more than a few occasions where one of several pieces of anecdotal employment data conspire to cast doubt on the standing estimates for NFP.  That was the case with Wednesday morning's ADP Private Payrolls figures, and it was further corroborated by the employment component of the ISM data later that morning and then again by Jobless claims on the following day (we realize that yesterday's claims numbers were polled after NFP survey week, but markets will take everything they can get.  It's not as ideal as "survey week," but it was combustible, so on the fire it went!).  

Snowball Buying.

We know that interest rates have been broadly trending higher, and we know that short positions on rates (bets that rates would rise) increased into the end of March before being squeezed on the last 3 days of last week ("squeezed" in this case, meaning forced to buy because rates went low enough to trigger stop-losses).  Despite the squeeze at the end of last week, a large short base of positions remained in the market according to several surveys.  We don't know how much of that is left, but it's obviously been getting squeezed again over the past two sessions.

Spread Tightening in MBS.

It's been rough year for MBS if you disregard everything that came before it.  We began 2013 right in line with the all-time best spread levels vs Treasuries.  That means that MBS YIELDS were the closest to 10yr Treasury yields.  There are several ways to examine relative value, but in this case, we're referencing Fannie Mae Current Coupon vs 10yr Treasury Yield.  Since then, spreads have marched steadily wider (meaning that MBS was losing more ground into the selling trend than Treasuries), ultimately topping out around 76bps.  This week has seen a good show of support around that 76bps level and a mega aggressive push back on Thursday (dropping to 68bps at one point, see the chart below).  Much like the tradeflow considerations were a complement to the pre-NFP Front-running, so too is this spread tightening.  

This could either be good or bad for us today, depending on the extent to which it's "over."  As blatantly obvious as that might sound, there are reasons it might not be "over" simply because it was a big move.  But whether or not the same is true for broader bond markets is perhaps less of a neutral thing.  Perhaps we've been conditioned to be so fearful of the constant rising rate environment that we're too quick to expect the end of a rally.  For sure an extremely weak NFP reading stands a great chance to further the rally, but anything else will leave the onus squarely on the technical/tradeflow environment.  While we can only guess as to whether or not a majority of the short base was washed out with a move to 1.76% in 10yr yields, we can actually observe how yields have moved since the last highs:

Being at this position in the range, and right on the 200 day moving average makes any NFP print of 160k or above a fairly scary thing.  That said, it doesn't make a big bounce higher in yield a SURE thing.  The only sure thing is that if NFP prints around 160k, and if we rally further on that news, it would be a very strong statement about a return to a sideways range from the recently dominant uptrend in rates.