MBS Live Day Ahead: NFP vs ISM

Bonds rallied big yesterday on a combination of factors.  These included a rejection of the Trump administration's claimed timeline for the US/China trade deal with sources citing Chinese officials and a super weak reading on Chicago PMI.  The gains added on to the previous day's positive reaction to the Fed.  That left us to approach today with both optimism and trepidation.

Optimism was warranted because bond momentum often shifts course after a Fed meeting and also after the end of the month.  Both of those factors are in play today.  Trepidation was warranted because the NFP forecast was surprisingly low (89k vs 136k previously).  The only rationale for such a low print was the UAW strike.  

As we discussed yesterday, there was no great way to know how big a bite the UAW strike would take out of payrolls, but 89k felt like a bit too much of a drop.  Now this morning, that trepidation turns out to have been healthy as the actual number came in at 128k.  Moreover, previous months' revisions added even more labor market positivity.  Beyond all that, the biggest issue overlooked by analysts is the fact that the UAW strike is a TEMPORARY detractor from the payrolls number, so what does that really matter in the bigger picture?  It's not speaking to a bonafide shift in labor market strength!

Fortunately, traders are well aware of labor market strength and reasonably high payroll counts are the rule instead of the exception.  As such, it's no surprise to see minimal losses following this morning's strong numbers.  It continues to be the case that the 10am ISM Manufacturing data has much more power to cause a stir, AS LONG AS it's fairly far from forecasts.  Those are currently calling for a reading of 48.9 vs 47.8 previously.  If the actual number is under 48.9, we should continue battling back toward pre-NFP levels.  If it's under 47.8, we should fully erase the morning's weakness.  If it BEATS the forecast, the results are harder to predict, but will be informative nonetheless (and painful, to some unknown extent).