Disappointing payrolls would put us back to square one

Core bonds resumed their selling trend yesterday. US Treasuries underperformed German Bunds. It’s the path of least resistance for bonds these days with risk sentiment still supportive and oil prices continuing their uptrend anticipating the outcome of the OPEC(+) meeting. Weak German factory data and low US weekly jobless claims had no impact on trading. US yields added between 1.9 bps (2-yr) and 3.6 bps (10-yr) on a daily basis. German yields rose by 0.3 bps (2-yr) to 2.1 bps (10-yr). 10-yr yield spreads vs Germany widened 1 to 3 bps with Greece outperforming (-3 bps) and Italy (+6 bps) underperforming.
Asian stock markets color green this morning with India (-0.5%) underperforming. Core bonds are a tad weaker after Chinese media reported that the country is working on tariff exemptions on soybeans and pork imported from the US. Overnight, there were also constructive comments from both sides on trade talks. The new SPD leadership softened its stance on leaving the government ahead of the start of the party congress.

November US payrolls are this week’s apex. The largest strike in more than 10 years impacted the October growth figure by 48 000 jobs. That led to well below-average 128 000 new jobs. Consensus expects US businesses to have created 183 000 jobs in November. This includes an obvious boost in the manufacturing payrolls of 50 000 after the GM strike ended by the end of October. Given the malaise in the sector (see Monday’s disappointing ISM at 48.1), risks are that the positive GM impact is offset more than expected by job cuts in the rest of the manufacturing area. Private service-providing is expected to add 139 000 jobs. Retail trade and leisure & hospitality have been the strongholds in services job creation. We expect the latter to retreat after an exceptionally strong October, adding further to downside risks. Lastly, Wednesday’s ADP job report missed estimates. Although there’s no one-on-one correlation with the official payrolls report, the margin of the miss (67 000 vs. 135 000) should not be ignored. A payroll miss would be positive for US Treasuries and put us back to square one following a volatile trading week. The outcome of the OPEC meeting is a wildcard for trading.

Technically, the German 10-yr yield broke above -0.41% resistance as geopolitical uncertainty diminished and capped intermediate resistance at -0.328%, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the upper half of the 1.43%-1.94% sideways trading channel. First tests to take out 1.94% failed. First support kicks in around 1.7%.

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