The Day Ahead: Jobs Report to Read Verdict on December Taper Risk

Yesterday

- Bond Markets extended losing streak after stronger GDP and Jobless Claims

- MBS held their ground fairly well considering the data

- Charts ended up looking like a choppy extension of Wednesday afternoon

- Rate sheets were unchanged

Today

- All-important Employment Situation Report at 8:30am

- Possibilities are always endless on NFP days

- Recent weakness does a good job of preparing MBS for an NFP 'beat'

- It also sets us up for at least a token correction on a 'miss,' or possibly even a flat reading.

Strategy

If you missed it by any chance, yesterday's Gorilla analysis is worth a read.  Yesterday's activity is well-explained in the context of that analogy.  The stronger than expected GDP and Jobless Claims data would be akin to some sort of ominous gorilla-like noises emanating from the city.  Had our brave band of refugees not already distanced themselves from the city quite a bit, the gorilla noises may well have scared them into retreating at a faster pace.

As it happened, there was still a retreat, but not a very panicky one.  It's as if the refugees heard the noise, recognized that it could be a threat, took a few steps back, and went right back to waiting for Friday morning's final verdict on whether or not there was a real giant gorilla ravaging the city (if you didn't click the link, the 'gorilla' represents NFP, the city represents bond market strength, and the refugees represent bond market traders.  If the gorilla is real, refugees move farther away from the city just as traders would move farther away from anything resembling bond market strength).

The mystery surrounding said gorilla, up until this morning at 8:30am, has been whether or not it's real or a hoax.  For the purposes of the analogy a real gorilla would be a strong NFP report--fake would be weak.  The thinking goes like this: we've had a pretty rough time recently, whether considering the past 6 months or the past 6 weeks.  Most of the recent data has us conditioned to expect surprisingly strong economic data.  As such, there has been a healthy amount of defensiveness against a stronger-than-expected jobs report today.

That doesn't mean that MBS and Treasuries can avoid a sell-off no matter how strong the report is.  Indeed, bond markets have to set up for such epic events with some degree of neutrality, and all things being equal, prefer to be at the most central location.  But because all things haven't been equal (the data has been skewed positively), bond markets may be slightly off-center when it comes to that neutral territory we tend to seek before major data.  I don't know how much of an extra concession this might amount to, but the implication is we could still do fairly well if the data is close to consensus.

"Doing well" requires some qualification because unfortunately, I'm not talking about an epic, sustained rally happening in response to a minor NFP miss.  The core of the matter is the FOMC Announcement in 2 weeks.  If today's report is flat or weaker, it very likely takes December tapering completely off the table.  That's debatable depending on who you ask, but I think it would be a clear consensus among the folks paying the most attention.  It's this eventuality of "tapering coming off the table for December" that would allow a bit of corrective consolidation, because potential December tapering is what the fear-inspiring capacity of the gorilla is really all about.  Take that away, and the gorilla has no teeth.

But what about a stronger-than-expected NFP?  What if the gorilla has teeth? 

As stated above, we've sold off at a healthy clip in recent weeks (really it's been since Halloween, but with a few days off in mid November).  That will hopefully mean that bond markets can weather a moderate 'beat' without freaking right out.  Of course one of those crazy, occasionally-seen 100k+ beats can still cause a freak out, but at that point, we're talking about a very real gorilla with very real teeth.  In that case, a new state of disarray would ensue until we could get clarity from the Fed on December 18th.

Charts

ADP private payrolls (in fuschia, or whatever color that is) compared to the soon-to-be-released US Private Payrolls (in the weird orangy color).  The private payrolls component of NFP is probably even more relevant than NFP these days.  Either way, Private payrolls and NFP are forecasted at the same 180k.  If there's a big beat or miss, be sure to look at what Private Payrolls did because they may help explain any counterintuinitive reactions.

10yr yields, and an approximate slope of the recent trend, beginning 30 minutes after the last NFP.