MBS Day Ahead: Suddenly, NFP Matters Again. Maybe This Chart Explains Why

For nearly a year, NFP hadn't mattered.  That is to say, it ceased filling it's usual role as big-picture guidance giver.  It was no longer setting the tone for entire months of trading, and in many cases, it's obvious fundamental suggestion ended up seeing the opposite trading response. 

The clear wrench in the works was--and possibly still is--Europe, both in terms of general economic malaise and QE expectations (now fulfilled).  In that sense, disregarding strong NFP's throughout 2014 made great sense for the traders who were smart enough not to be swimming against the tide of Eurodrama.  But then our own domestic heavy hitters started talking about their own potential counterpoints to the seemingly rosy picture painted by perennially strong payroll creation.  And what's more, the counterpoints not only made good sense, but the flat out resonated with econo-bears who continued to lament the US recovery.

We're talking about wages.  The fact that 60% of the American population made less per hour at the end of 2014 vs the end of 2007 is a huge red flag for inflation.  In 2014, it quickly got the attention it deserved as the missing piece of the inflation puzzle, and the conclusion logically followed that traction in wages could presage the inflation the Fed is looking for in order to be fully justified in curtailing accommodative policy.

If there was any doubt, Yellen removed it last week by saying that continued improvement in wage growth would add to her confidence on the inflation outlook.  Even though she also said the Fed wouldn't necessarily wait for wage growth before raising rates, the fact remains that it's one of the only reasons the Fed is waiting.  So when last month's NFP data not only showed strong job creation, but also the best wage growth of the recovery, NFP suddenly mattered again.

It probably won't prove to be the sole focus in today's NFP data, but if the report is generally strong again, then wage growth would act to amplify that strength.

As far as the bond market stance heading into today's data, Treasuries have done a good enough job of holding support that we can believe they'd be willing to keep holding (or even improve) if the data is downbeat.  On the chance that we hold our ground even in the face of a strong report, that would be the most informative result possible, as it would confirm tremendous latent positivity/resilience in the long-term trend.