US NFP might see a below consensus print

Yesterday’s market action

We saw the large-scale decline in the longer-dated German paper move back higher; the German10YR, having tested as low as 151.44 we saw a move this morning testing the 155 handle to the upside. This panic selloff largely subsided into the latter half of the morning where the oversold market returned higher. The continuation higher this morning can also support a risk-off environment which we are moving into ahead of both NFP and in the wake of the Chinese data which printed overnight. We saw poor trade figures print a reading of -6.2% for YoY exports this morning, against the expected +0.9%. Imports were similarly poor down at -16.1% on the annual figure. Returning to the UK general election; in a surprise move we have seen a significant exchange of power in the UK political space. The Scottish Labour Party have been all but eradicated, the Liberal Democrats have been given their marching orders and several key players including Shadow Chancellor Ed Balls have been given the chop. This morning has also seen the leaders of the major parties reshuffling as UKIP’s Farage, Labour’s Miliband and the Liberal Democrat’s Clegg have all resigned as leaders of the party. This has translated into a sterling strength play and UK equities have been bid as we have seen regulation and tax risk recede from the forefront of many investors’ minds. The FTSE 100 gained 100 points in opening trade, with financials and energy stocks leading the way. At time of writing (11:25) the Conservative party are a mere 1 seat from an overall effective majority which would secure the Conservative-led government and add to investor confidence. GBPUSD has made new highs on the session, trading above the 1.55 handle for the first time since the 26th of February. This has been largely helped not only by the UK election results but also the dollar weakness play we have seen since mid-April. This isn’t a clean-cut situation however as we still have the Conservative’s promise of an EU referendum in the next two years which adds to medium term risk. We also wish David Cameron the best of luck as he conducts interviews for a new tea-lady. 

Today’s View

Today we see the Non-Farm Payrolls release for the month of April, expected at 230k. Looking back at the previous month’s result of 126k it is safe to assume that markets will react negatively to another bad print in this area due to the interest rate hike being put on hold. We will likely see further dollar weakness as rates are kept lower for longer, a bid in T-notes on both interest rate-yield benchmarks and risk-off move. We are looking at a likely miss on the headline, primarily because of the lacklustre corporate revenues we have seen this quarter; as revenues have fallen many corporations will be looking to streamline their workforce, potentially leading to a lift in unemployment. Although we have seen a fall in the Initial Jobless Claims space, this data has the potential for lag as the recently laid off workers will still be on payroll until the end of their severance. Something to watch out for. The most confusing trade will be in the equity space as the quality of the beat of expectations will likely determine the date of the rate hike. f the number is negative priority should be given to the dollar trade as it will be simpler to find a direction quickly. The other numbers to watch out for are the employment rate, expected at 5.40% and the Average Hourly Earnings, expected at 0.20%. Any misses on wage-growth or surprises on the unemployment rate (the latter, unlikely) could spark a further decline in the strength of the dollar and a move towards the treasury space. If the number prints better than expected, it is likely that there will be a spike higher in the US equity space before closing lower as market participants begin to price in a September rate hike. T-notes have priced in a September hike already so, if the number prints better than expected, downside in T-notes is limited in scope. The cleanest trade will be a dollar long trade on the back of stronger data. Oil is likely to reflect the strength/weakness in the USD so trades will be reactionary.