Thursday, August 6, 2015
Jitters in Front of This Year’s Biggest Data Event
Eurodollar and Treasury futures are slightly higher in early trade on Thursday, August 6th with the Eurodollar futures yield curve basically shifted 1-2 bp lower and the Treasury curve too with movement of a similar magnitude.
With the exception of Fed Funds futures, open interest fell across the curve yesterday as longs became anxious to book profits following a powerful three week advance. Price action yesterday was volatile as early bullish reaction to a weaker than expected ADP report did not hold. Then the stronger ISM nonmanufacturing data prompted strong selling and a steepening curve. In standard ‘pre-payroll’ trading fashion, much of those losses were corrected before the session’s close.
As earlier indicated, open interest rose in Fed Funds futures. This was likely triggered by adjustments, made with additional confidence, to expectations for when the Fed might alter its stance on the primary policy rate.
Economic data today should not be expected to be impetus for strong price movement unless it is found that positioning is ‘off-side’ on the approach of the employment data tomorrow. Initial weekly claims have trended lower since early ’09 and the pace of that improvement has been modest since the start of the year with the 50 week moving average trending from 308K to 287K recently. The range of data tending to a 260K-300K corridor.
Bottom Line: The three week Eurodollar and Treasury advance was impressive and the reverse lower on Monday and Tuesday from those rather uninterrupted gains points to the possibility that if there is angst in squaring positions in front of the employment data, it is more likely held by the marginal long. As a reminder, price action in front of payrolls does tend to return toward early morning, pit-open levels after any modest move intra-session. When there is a substantial price correction in the two sessions prior to the employment data however, we are well advised to take notice and recognize the significance of revised expectations.