Tomorrow is the release of the U.S. and Canadian Employment reports, which are usually days of increased market volatility. Usually, Notes From Underground provide some insight into possible market movement based on attaining a sense of investor consensus and putting that into perspective based on relevant indicators and pre-release price action across a wide variety of variables.
For tomorrow’s release, however, I am perplexed because of today’s market volatility in response to Chicago Fed’s Charlie Evans opining on the FED needing to remain “PATIENT” far longer than the current Summary Economic Projections’ (SEP) “DOT PLOT” would indicate. The SPOOS began to rally in total synchronicity with Evan’s statement yesterday evening, which is hard to believe for it was a reiteration of his previous views. It wasn’t the SPOOS’ rally on its own but the fact that is was coupled with a violent move in the YIELD CURVE as the short-end stayed bid and long duration U.S. Treasuries were aggressively sold, leading to a large correction in the 2/10 and 5/30 curves. It was this move to STEEPEN a previous flattening move that helped to propel the SPOOS higher.
So it sets up tomorrow as a good test for interest rate markets. The consensus for the NONFARM PAYROLL is a gain of 235,000 jobs, the unemployment rate to remain at 5.8% and for a slight gain in average hourly earnings of 0.2%. Last month’s NFP gain was 321,000 but it was interesting that the ADP release on Wednesday failed to have any sizable adjustment to its November projection of 227,000, which could mean that the Labor Department data is adjusted downward.
If the JOBS number is weak, the yield curves will continue to steepen as the recent flattening of the curve (2/10, 5/30) will have been deemed to be too much too soon and any hint of early FED action will be removed from the market. If the NFP and AHE are much stronger than consensus the 5/30 will resume flattening because Charlie Evans will be deemed a lonesome dove. But with all the geopolitical news and ECB gyrations, this is the most difficult time for the unemployment data to provide any genuine guide for market direction. Caution and PATIENCE and like the FED be data dependent.