280k on NFP could change sentiment in a minute

Outlook

The big story this morning is payrolls, expected around 215,000 from a range of 199,000 to 250,000. The market is expecting a good number, hence the rising yields and dollar over the past two days, but spikes are the norm and spikes we will probably get. We also get revision of past months and details on hourly earnings and the participation rate, any of which can trigger spikiness, too. For a lasting positive dollar effect, we need the 10-year yield to get back to 2.66% or more and stay there.

Market News reports that SocGen economists have a forecast of 290,000, which would be the biggest gain since January 2012 and far exceed the current 3-month average of 234,000. The SocGen model “projects that an above-consensus print in the 270-320k range should push 10y yields higher by 6-11bp by Thursday's close, and decisively into the upper half of the recent range (above 2.65%)." This adds another voice to the ADP forecast yesterday of 281,000 in the private sector alone.

At a guess, numbers like 281,000 and 290,000 could also be seen as an outlier and have only a short-lived effect. Alter-natively, maybe the first quarter’s slowdown hurt us more than we know, despite the excuse of bad weather. We said “bad weather” but suspected things were really worse than bed weather could justify. Besides, inflation was on the upswing. Now the deceleration in home prices is becoming accepted as a necessary consequence of overbuying earlier in the cycle, and perhaps sentiment is swinging back to the positive from an excessive move to the negative.

Hey, it could happen. Sentiment is a funny thing. A single number like 280,000-290,000 could change sentiment in a minute. Traders are obviously preparing in case this is the outcome.

Separately, Yellen said yesterday that the BIS has the wrong end of the stick when it calls for policy rate changes to ad-dress financial instability, i.e., irrational exuberance. The better tool is regulation. This would be true if the Fed ever took any regulatory action, like raising margin requirements. We are disappointed, and also disappointed that Yellen used the vague term “spillover” and also “spillback” to describe market responses. “"We certainly strive to avoid harm in generat-ing spillovers when we use monetary policy…. spillbacks ... are central in our analysis of our own economy and what the impact of all policies would be." It would be more transparent to come right out and say “if emerging markets take a hit when we raise rates, too bad; we don’t make policy on behalf of other countries.” Or something.

Turning to the ECB, most observers think the statement and press conference will be tame and repeat only what we al-ready know—the ECB is in preparation mode for LTRO in the fall and maybe ABS and even more remotely, maybe QE in sovereign paper. Expectations are low for announcement of anything new, and now that the euro is falling, Mr. Draghi has less need than before to talk the euro down—although he may seize the opportunity to give it a helpful shove in the direction it’s already going.

We are surprised that sentiment has turned so quickly in favor of a dollar rally. It’s a combination of old forecasts getting dusted off (excellent growth in Q2), negative sentiment getting put into perspective (housing deceleration), and blind hope of one spectacular number. It goes without saying that one spectacular number is not a description of a big and complex economy, but markets like simplicity and sound bites. And if we don’t get the one spectacular number, the dol-lar goes back in the soup.

Note to Readers: Friday, July 4 is a national holiday in the US, Independence Day. Market are closed. We will not publish any reports.