It’s that time of the month again already…..and with a full moon to boot! Bring out your crystal balls, ouija boards, tea leaves, and the collected works of Nostradamus, John Dee, and Hermes Trismegistus. Yes, ladies and gents, it’s payroll day today.
The data comes at a curious time for markets, which seem uncertain about whether or not to lurch into the usual September downdraft, or whether to execute a trampoline-style bounce. Certainly the mandarins in Beijing are attempting to execute the latter, with yet another “regulatory enhancement” announced today- namely, increasing the maximum QFII quota per asset manager from $800 mio to $1 bio. In the context of the size of the A share market, this is like increasing the weight of foreign participation from a proton to a neutron.
(This hasn’t stopped the usual suspects from trumpeting the impact of the move, however.)
In any event, we’re at an interesting juncture in the US labour market. The straight-line deterioration in the data has evidently come to an end; while the unemployment rate dipped for the first time last month, ancillarly indicators like weekly claims and the jobs hard to get component of the Conference Board survey showed signs of stabilization/improvement earlier.
So really, we could get anything today, and that’s outside of the usual statistical frailties of the data. Your guess is as good as the magic 8-ball’s.
What’s notable, however, is the fairly extreme change in market pricing since the last, reasonably “strong” employment figure. While US fixed income of every stripe was marked lower on August 7, the following Monday saw a strong bounce that has continued uninterrupted to this day. The rally in the eurodollar strip has been particularly impressive, with the reds and beyond all rallying 75 bps or more.
To be sure, that’s partially a function of jittery equities, partially a reaction to dovish rhetoric from Jackson Hole (though that didn’t stop Stan Fischer from jacking rates up), and partially a function of the continued decline in spot LIBOR.
But at the same time, it’s also ignored the fact that the cyclical data has remained pretty decent over the last few weeks, as evidenced by the Citi economic surprise index.
Of course, as noted the other day, this divergence could simply represent a warning sign that so-called “smart money” is rotating out of the bullish trades and positioning for weakness, as we seem to be at the apex of enthusiasm for the inventory rebuild and cash for clunkers.
On the other hand, it could just be a naked carry trade; certainly we’ve seen that in other markets such as Euribor.
Either way, it looks like a lot of risk premium has been taken out of the eurodollar strip, and it doesn’t look like a bad bet to take a punt on a correction of the last month’s trend, whatever the NFP randomizer spits out this month.
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