By David Gaffen
As Abraham Simpson would put it, “that’s a job report you can set your watch to.” Overall growth came in a bit better than expected, with job growth at 248,000 and the unemployment rate dipping to 5.9 percent. There’s no wage growth, of course, because, well, it’s kind of an ongoing situation now, and the U-6 rate of underemployment fell to 11.8 percent, which is also overall strong news.
The market’s initial reaction is telling – bond markets are selling off, with more pain in the five to – and 10-year area of the curve, reflecting expectations for higher rates before long but not so much that you can really point to something that will derail economic growth. With futures higher, the thinking right now is that the market will manage to close out the week with a somewhat better tenor than it did coming into the week.
The question is whether the selloff that’s taken down the small-cap names and energy stocks to correction (or near-correction) levels have hit a crescendo – there certainly was a lot of volume at the bottom of the market on Thursday, judging by futures trading.
The overall malaise that has engulfed Europe, the concerns investors have about Russia and Brazil, and the protests in Hong Kong look likely to keep a bid under the bond market as well. CRT Capital’s monthly pre-payrolls survey showed investors more bullish than their September survey, with 59 percent of those surveyed looking for lower yields (highest since February 2013), and there’s a lot of people ready to buy on the dip as well.
So that looks to suggest that there’s an extension of the rally going on. And notably today while markets are selling off, as one would expect with employment falling through 6 percent, the weakest area is in the belly of the curve, in the 5-10 year maturities (the yield curve in the early post-jobs going is steepening modestly, at least, the 10-year/2-year spread), while the 10-to-5 is flattening a bit.
Economist Chris Low of FTN noted in comments this morning that the ECB’s easing policies are going to keep driving the Europeans to buy long-dated Treasuries, so add that to the mix on why the 30-year is having the most muted of responses this morning after the jobs data. The moves also – per bond market reporter Richard Leong – suggest better-than-expected growth than people were expecting and a possible change in the outlook for tightening.
Furthermore, the selling is matched by selling in the big Eurodollar futures contracts (where there’s a ton of trading, particularly right now in the late 2015-early 2016 maturities). These contracts are often sold in bundles with maturities around 3-5 years, so there’s matching selling going on in the bond market too as investors add to short positions because, again, of the effect seen on the outlook for the Fed. That’s a lot of technical stuff here, so breathe a bit.
Stepping back, the fund flows figures show that investors – even as we see the backing down in small-caps – are continuing to rotate their cash around the market rather than retreat entirely. Flows were lousy in high yield (big outflows of $2.3 billion), but good for investment grade (big inflows of $3.1 billion), so the larger picture just hasn’t changed – brief interruptions notwithstanding.
