Thursday, March 6, 2014
Treasuries Not Ready for Data Event
Market participants ready for the employment report on Friday having seen an unexpectedly weak ADP payroll report on Wednesday. The ADP report had been showing greater employment strength than had the Bureau of Labor Statistics non-farm payroll (nfp) series over the last months. Many would assume that this lower ADP report on Wednesday is syncing the two series at a lower level of employment growth.
Changes were made to the ADP survey about a year ago with the expectation that variance between the two surveys would be reduced. Since then, there have been only mild discrepancies in the data series and traders have once again become comfortable in finding predictability for (nfp) through the ADP releases. Over the years, there have been repeated, but well separated, instances where an ADP report altered expectations for a nfp report only to have given a false signal. It has been a long time since any large discrepancies in these two data series has occurred and traders are once again comforted by this period of data sync.
The ADP payroll report on Wednesday was 139,000, 10% below the Bloomberg survey estimates. Since then, economists have been lowering their forecast for nfp. Bloomberg survey now shows expectations for 149,000, above the prior month 113,000, but well below the prior 4 month average of 188,000.
Treasury prices had risen as continued weak economic reports found concerns growing that severe winter weather may only be a small part of the reason for recent below trend growth. Too often has the Fed failed by predicting forthcoming economic strength and the recent tapering of security purchases is seen by some as another in a series of accommodation removal episodes prior to sufficient economic traction being achieved.
This was the backdrop for already firm Treasury prices late last week. Over the weekend, news of Russian moves to secure interests in Ukraine prompted bullish ‘haven’ status buying of U.S. Treasuries. On Monday, 10 year Treasuries moved above recent highs to test levels not seen since late October ’13. While prices remained higher on the day on Monday, they were unable to hold the session highs and formed a bearish technical pattern in candlestick analysis – a bearish ‘hanging man’.
The bearish implications of this pattern was confirmed on Tuesday when the 10 year Treasury future (front contract) had its largest single session open to close decline since early November. This confirmation session followed with a lighter volume pause on Wednesday that failed to recover much of the prior session decline.
As of 9:00am EST on Thursday, Treasury prices are slightly lower (TYM4 -9+ to 124-01). Generally speaking, Treasury prices have a tendency to consolidate on the approach of the payroll data. However, when there is a ‘significant’ move in the session prior to the employment report, it may indicate that economic agents have found something that has materially changed their collective view and are found not waiting for confirmation in the payroll data. At this stage, no such argument can be made that 9 to 10 tics lower in TYM indicates such a sentiment change. A move to 123-19 might indicate such a changed view.
Because accounts have already adjusted to weaker economic data and have factored in heightened geopolitical risk, the prospect are high for an exaggerated reaction to a slightly better than expected economic data event. (see ‘Treasuries Not as Haven as Could Be’)