Thursday, May 1, 2014

Where is NFP Risk

With USM4 (Treasury Bond Futures) 1.5 points higher in the last two days, we are asked where the NFP risk now lies.  The answer may be different for opposite ends of the yield curve.  There needs to be a considerably longer period of stronger economic data to impact the longer end of the curve than would be the case for shorter duration instruments.  With the Fed on course to eliminate additional purchases by October of this year and a growing focus on a policy rate lift-off directed toward Q3 ’15, the Eurodollar Reds, Greens and Blues are particularly more likely to react to an outlier in tomorrow’s Payroll report than would the Bonds (charts). 

Knowing that the front end will react more strongly than longer duration instruments is still not the most vital information sought.  Instead, given an expectation for 218,000 in non-farm payrolls, what absolute basis point move should be expected if the report results are 50,000 off that mark in either direction?   We might expect that a short-fall of 50,000 (nfp of 168k) may be treated differently than a surfeit of 50,000 (nfp of 268k)(chart).

Non-commercial (‘large-spec’) accounts including hedge funds are net short near record amounts of Eurodollar future and options.  These account types held onto these positions in the run-up to the mid-April highs as the series of weaker than expected data points peaked along with Red, Green and Blue Eurodollar prices.  There was some hedging of these short positions on the margin, but core positions were left largely intact, at least as far as currently available data from April 20th is available (chart). 

The Fed did not say anything unexpected in the April FOMC meeting statement yesterday, but the Q1 GDP earlier released was well below expectations.  While most analysts had been expecting Q2 to recapture severe weather impacted growth, the shortfall in Q1 is enough to rekindle some concerns for an underlying deterioration of growth path that might not be recovered.  Therefore, a stronger economic report in payrolls will weigh more heavily on the front end of the curve as it will more greatly impact expectations for current trend growth (chart)

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