US NFP likely to be lower, but above 200k

Fundamental View

The main event yesterday was of course the ECB meeting held in Cyprus, rather than the traditional tasteful location of Frankfurt headquarters. Mario Draghi, a ‘neutral’ dove, began with surprisingly hawkish commentary. He mentioned the revisions to Staff estimates for inflation outlooks over the medium term, seeing them return to near to but below 2%. This forced the EURUSD higher to test the pivot level. It was the commentary that followed this that began the real move for the afternoon. We saw the longer dated German Government Bonds push to new highs on the back of polarised dovish commentary. This commentary included key language which state that “purchases are to include treasuries with negative yields so long as the yield remains above the deposit rate of -0.20%. This immediately allowed the bund and buxl to move high on the back of the bull flattening move, a move which brings down long term yields along the yield curve. The demand for the longer dated paper increased and allowed T-notes to move higher in a correlated move. The Euro weakened further overnight as traders globally began to price in the full support of the Governing Council; the Euro now presides below the 1.1000 handle.

Today’s View

This morning we had the second 4th quarter preliminary post in-line across the board with little reaction seen in the markets. The EURUSD and bourses remained flat after the news at 10am as the majority of participants await the headline data for the day. Non-farm payrolls are expected at 235k today with a high and low estimate of 370k and 150k respectively. This makes any attempt at trading an exaggerated beat of the range difficult as the dispersion of estimates is so wide. We can also read that many institutions are uncertain with no real consensus reading. The data is likely to be slightly lower but above 200k as we are seeing an improving jobs market but hindered by the weather and the bank holiday. We also saw Initial Jobless Claims post three out of four weeks with a reading of 300k and above. This, coupled with the weather effect, implies todays reading will be lower. The component readings are likely to be similarly affected. The Average hourly wages are likely to be in-line with expectations but lower than previous, again accounting for adverse conditions; Average Weekly Hours are likely to be slightly lower. Overall today’s strategy will be risk averse due to the uncertain nature of the data being released this afternoon.