There were some decent clues in yesterday’s session as to how various outcomes of today’s Employment Situation Report will motivate trade. The biggest pop of volume and volatility in yesterday’s session came with the ADP Private Payrolls report which showed and increase of 176k payrolls vs a 105k consensus and 133k previous. Markets definitely reacted to the data, and it definitely suggested that NFP be revised higher, but bond markets ended up trading into the green by the end of the day. What gives?
In a word, nothing. Nothing gives… Nothing wants to give or take or do anything other than wait and see and relentlessly pursue “sideways.” Bond markets obviously wanted nothing more than to trade the 10yr from 1.60 to 1.58, and were thrown for a bit of a loop by the better-than-expected ADP. We actually think the meaningful volume/volatility response had more to do with trying to anticipate how other market participants would be reacting rather as opposed to trading of one’s own volition. Traders quickly confirmed that everyone else was just as scared of deviating from a narrow sideways pattern as they were and life moved on, aided no doubt by an underlying bid from the ECB rate cut, the ECB Press Conference, and lackluster ISM Non-Manufacturing.
ISM is the other clue actually. Whereas the ADP data can be explained-away both in terms of its historical misses vs NFP as well as the fact that the actual suggestion for NFP’s Private Payroll component really wasn’t all that massive, ISM is a different sort of report. When the manufacturing version came out earlier this week, we mused that the resilient Employment component could have been helping markets hold their ground to a greater extent than we thought the headline would suggest (in other words, the headline suggested a bigger rally for MBS and Treasuries).
Now we get the same situation with the Non-Manufacturing data where the Employment component is the only real shining star, although in this report, it was actually HIGHER than previous. If our hunch about the employment component was worth its salt, we should have seen a bigger fade of this data. In other words, we would have had the first ISM report earlier in the week, the ADP figures earlier in the day, and the 10am ISM data all suggesting a rosier outlook for employment. As it turns out, we think we have things figured out now. We’ve been giving markets too much credit. We’ve been accounting for too detailed an “if/then” scenario.
There wasn’t a bigger rally on the ISM data earlier this week and there wasn’t a bigger sell-off on the ADP and ISM data yesterday NOT due to the carefully considered conclusions about the data’s internals, but simply because markets are sideways and very much afraid to be anything else. This goes back to the recent “triangle” breakout where we would have normally been expecting a fairly big directional move after the triangle broke. But as Greek Elections and FOMC Announcement failed to create this scenario, we grew cynical ahead of last week’s EU summit, noting that the triangle must inevitably be broken, but that it wouldn’t mean anything unless the horizontal price levels that define the range were subsequently broken. They were not, and here we are… Still waiting for same.
Far be it from us to tempt fate, and indeed it feels fairly safe to do so considering the significant support levels overhead, but we can’t resists… C’mon NFP… Show us whatcha got!