MBS Day Ahead: Here's Why NFP Means Absolutely Nothing Past the Next Few Hours

Oh man... I'm about to say some crazy stuff.  If I could go back in time one year and tell myself "hey, past self, in a year you're going to write an article and make a crazy chart claiming that NFP doesn't matter any more," I might have tried to detain my future self until he could be reasoned with.  After all, I wouldn't want him to damage his credibility by saying things that completely contradict things he's said in the past.

But that's how it is in global financial markets.  Something that was excessively important in the past may go through periods where no one gives a damn in the future.  Inflation is a great example of this and I felt really bad for all the old guys who were tuned into markets in the 70's and 80's, because they just couldn't accept that inflation would be an utter non-event for--what is it now?  5 years at least.

Now, that will change some day, and even at times in 2014, inflation data began having a tiny visible effect here and there, but the point is that it used to be a massively important guidance-giver for bond markets.

So did NFP...

The following chart doesn't lie.  NFP just hasn't mattered at all for the past year.  Not only that, but bonds have almost exclusively gone in the OPPOSITE direction as that implied by the NFP result (bonds rally on misses and sell-off on beats).  This is a candle chart of 10yr yields.  NFP release dates are circled.  The beat or miss is annotated, along with a few relevant details for a few of the releases.  Click on it for a larger version. 

So to recap, that's 9 out of 12 reports that saw the opposite effect and only 1 report that resulted in 'as-expected' trading. 

While it's obvious in hindsight that there's a perfectly good explanation for WHY this happened (Europe pulled US rates lower and payroll creation happened to be strong), it doesn't change the fact THAT it happened.  In other words, we can't really know what global market consideration might trump NFP this time.  We don't even know if it will happen.  What we can know is that NFP is clearly no longer setting the tone it used to set.

This is no different than what we've been discussing for most of 2014.  Strong job creation is old news.  In terms of payrolls, 200k+ prints are the rule recently--not the exception.  That's actually really good for us, because it provides insulation against the short-term impacts of additional strength.  To be sure, if NFP beats big, there will likely be short term selling, but that selling is lessened by the aforementioned insulation, and the broader trend suggests it might not even make it through the day.

Weakness after a weaker NFP number is a different story.  That's what we need to be worried about because that would bespeak an underlying motivation to sell bonds regardless of data.  In that regard, we can watch German Bunds as well.  Unfortunately, the only trend emerging so far in February is toward higher yields.  We'd need Germany (because they represent the risk-free core of the European bond market) to break back toward or below the all-time lows seen at the end of January if we're to have any chance of domestic rates getting back below recent lows.