US NFP needs a print higher than 233K to calm the markets

Outlook:

We have a number of issues up in the air and hardly any of them will be resolved anytime soon. The easiest is perception of recovery in the US after a bad Q1, and for that we will look to payrolls on Friday. Today we get the ADP estimate of the private sector component (8:15 am ET), expected at about 200,000. You have to love people who make trading and invest-ment decisions on a forecast of a forecast that has hardly ever been right. Last time, ADP had 189,000 for the private sector, off by 60,000 or over 30%.

Anyway, the public sector would have to add 60,000 jobs to bring the April total to the 2014 average. As always, the discrepancy between the forecast and the actual is the key. If we get a number well over 200,000, we can heave a sigh of relief and go back to our fairy tale that Q2 will be wonderful. If it’s less than 200,000, like March’s scary 126,000, we have to re-calibrate all our expectations about everything. For what it’s worth, Market News has a median forecast of 233,000 for headline NFP. If it turns out to be accurate, we’d say it’s not enough to resolve the Q2 problem. We really need a number seriously higher than 233,000 to calm the nerves, like 275,000-325,000.

The other big release is the EIA crude inventory report (10:30 am ET). Oil prices were already rising when the API version—a drop in supplies—was reported yesterday, and oil rallied in both the WTI and Brent formats. We saw explanations ranging from “inflation is up so oil is up” to “oil is up so inflation will go up.” We also heard “the dollar is down so oil is up,” as though the dollar had not rallied against the euro by a vast amount so far this year and the latest euro upmove universally considered a correction. No commodity or security exhibits as much circular reasoning as oil, and it’s a sad day when the FX market and other markets take oil prices as the key factor. Judging from comments, oil traders don’t know their ass from their elbow.

Lockhart and Yellen speak today but we don’t care. It’s not clear anyone cares about Fed speakers any-more. It’s not a lack of respect, it’s just the sense that they won’t say anything useful.

That leaves tomorrow’s election in the UK, with the Tories currently tipped as the leader but of course, you never know. Labour has Obama’s strategist in chief, Axelrod, probably the smartest guy in politics today. It also leaves the ECB policy meeting tomorrow, but unless Draghi says something specific about continuing to offer Emergency Lending to Greek banks, it’s probably a non-event. We need to watch out for any statement that inflation expectations have bottomed and will be rising in a straight line from now on out. We don’t believe that for a minute—in Europe or the US.

And that leads us to the weird action in the bond market. Just a short time ago, Bunds were yielding 0.15% and the yield went as low as 0.05%, with zero and negative a foregone conclusion. But a sell-off in Bunds has now lifted the yield to 0.53% (it was 0.55% earlier today). This is a temporary aberration, not a reflection of macroeconomic conditions, an inflation forecast or the product of manipulation. The ECB intends to buy Bunds along with other assets and earlier talk of a shortage of Bunds was not silly. The market is making Bunds available to the ECB for its own reasons, not because the ECB is twisting arms. As for the inflation expectation embedded in any and all yields, just wait. The bond mar-ket is undergoing a shift in allocations and outlooks. It’s far too soon to be attributing any inflation ideas into a process being driven by factors other than inflation. Note that yields on other European notes are also higher--France, Spain, Italy and Portugal. And the shift into equities continues, although that has limits, of course.

As noted above, we have a rise in US yields that is also not based on a changing macroeconomic outlook or inflation expectations. Yields are up because managers are divesting overbought levels or otherwise re-arranging their portfolios, including hedges. We need to be careful not to attribute grand theories to what is plain old-fashioned money-grubby motivations.

And what are the big picture macro ideas that will win in the end? The US will get good growth, maybe 3-3.5% or even 4%, while Europe will stagnate with maybe 1-1.5%. Neither party will get much inflation, unless oil goes nuts and even then there is quite a lag to core prices. We are not all Japan, but we are not in the 1980’s, either. In other words, be wary of saying the strong dollar is over.