Payrolls not good enough for positioning US Treasuries

Rates

Global core bonds, especially the Bund, tumbled lower in the European session that was devoid of economic data, but moved higher after the payrolls fell short of high expectations. There was no immediate trigger available for the down-move ahead of the payrolls, except maybe anticipation on a strong report. A certain calm reigned regarding Greece, as no negotiations will be held anymore before the referendum on Sunday. Regarding the payrolls, the June headline figure of 223K was slightly below expectations (233K) with a 60K downward revision of the payrolls in the previous two months. Wages disappointed though, as they were flat M/M versus a 0.2% M/M expected. On the other hand, the unemployment rate dropped more than expected to 5.3% from 5.5% previously and is now 0.2%-point of the current Fed gauge of NAIRU. So, a good, but no excellent report. However, the market was clearly positioned for a better report. US Treasuries spiked higher and following a small retracement moved still a bit higher, before sliding in a sideways trading mode near the day highs. . The Bund followed a similar post-payrolls pattern, but slid lower in US after trading and couldn’t erase intra-day losses. However, the price action shouldn’t have long lasting effects. We consider the report as neutral for the Fed, but the outperformance of the US 5-year sector suggests the market differs in opinion on that point. Spanish auction went well.

The US Treasury yields fell moderately in daily perspective between 1.5 bps (30-year) and 7.3 bps (5-year). The German yield curve modestly steepened with yields flat (2-year) to 3.5 bps (30-year) higher.

US markets closed for Independence Day

According to the first estimate, the euro zone services PMI picked up from 53.8 to 54.4 in June, led by strong data from Germany and France. The final reading is expected to confirm this outcome. We believe however that the risks are for a downward revision following heightened uncertainty around Greece. Euro area retail sales are expected to have increased only marginally in May following a strong 0.7% M/M rise in April. German retail sales surprised on the upside, rising by 0.5% M/M and also Portuguese and Spanish retail sales increased slightly in May, as well as French consumer spending. We believe that the risks are for a slightly stronger outcome, which would be an encouraging sign for Q2 growth.

Today’s trading: Waiting on outcome referendum

Overnight, Asian equity markets trade mixed, but Chinese equities remain very volatile and traded in the opening 5-6% lower. Losses are largely recouped now. FX markets traded unchanged and also commodity markets show little changes. While the US markets are closed today, the T-Note future trades in Asia and is also holding a sideways price pattern, now marginally above yesterday’s official close

Regarding trading today, the eco calendar is uneventful. We don’t expect a lasting reaction on the EMU PMI and retail sales, for which we see mixed outcomes versus consensus. The closure of the US market and Sunday’s Greek referendum should keep investors sidelined. There might still be some late repositioning in thin market conditions, but we wouldn’t over interpret such moves. The Bund is back to last week’s closing levels, indicating it didn’t really profit from the risk-off event Greece is. Peripheral yield spreads (10-year) are still 25-30 bps higher (Spain/Italy), which also shows that the market doesn’t consider Greece as an important source of contagion for other markets. It’s difficult to forecast the outcome of the referendum and what the reaction of the inconsistent and unpredictable Greek policymakers will be. A No vote might bring us closer to the Grexit and should affect both the German Bunds (positive) as the peripherals (negative). However, a Yes votes won’t solve all problems instantaneously. Internal political turmoil and the need to restart time consuming negotiations will raise uncertainties once again with the ultimate outcome still uncertain. For today, the 150 to 152.81 range for the Bund should remain intact. We have still an overall negative stance towards core bonds. SO, sharp downmoves in yield like on Monday, e.g. 10-year Bund yield to 0.50% are good.