USD Swaps: Stasis as market awaits NFP’s casting vote

Stasis as market awaits NFP’s casting vote

USD swappers in London said that their market is in near-stasis so far today as traders await an NFP data release (forecast May +195K, versus +253K in April while average earnings are seen at 0.3%/4.4% vs 0.5%/4.4%) that comes at a time when the market is craving a clear insight into the strength or otherwise of the US economy.

One such trader said this morning that “we’ve had a mish-mash of data lately, strong (ADP) jobs numbers, very bad PMI numbers and questionable inflation figures which has led to a lot of scrutiny about whether the Fed does 25bps and then pauses, or pauses and then does 25bps, or does something else altogether.”

He added that “setting rates on a point-by-point basis data-wise isn’t a great way to run monetary policy but the Fed’s backed itself into a corner and that means the market badly needs some kind of casting vote from NFP today. Inflation is set to keep mechanically falling but is juxtaposed by the aggressive resilience of the jobs market which has left the Fed’s future decision-making on a knife edge and made the front end of the curve very volatile.”

So presumably the market is hoping for either a very weak or a very strong number today, to clear away the mist that is shrouding views of where the peak in rates actually is.

In less than two hours we will all know whether that moment of clarity has been delivered, but in the meantime, said the above trader, “people are just tidying up and keeping things tight before assuming the brace position just before 1:30pm (London time).”

The upshot of this tidying process has been slightly higher yields across the curve, but also a slight outperformance of seemingly more active EGBs, where Bund yields are currently +5bps as equities rally reportedly (and in the absence of any other obvious driver) on the back of the announcement of a possible new China stimulus focused on supporting its troubled property market. S&P futures are +0.5% in pre-market trading.

The outperformance by USTs is probably predicated on the view that an on-target NFP will tip the Fed decisively in favour of a June pause, but on-target NFP has been a rare occurrence lately.

New issuance is taking its traditional NFP break leaving swap spreads to drift wider in a steepening formation. Currently the 2y spread is fractionally lower at -11.5bps, 5y is +0.25bps at -21.25bps, 10y is +0.5bps at -25.25bps and the 30y is +1.00bps at -67.50bps. On the UST curve the 10y yield is +2bps at 3.62%, with 10s/30s 0.5bps flatter and 2s/10s 1.5bps steeper.

Deutsche: Meaningful NFP surprise needed for June hike

Strategists at Deutsche Bank today predicted an NFP headline today that is fractionally above the +195K average forecast, but said it would need a bigger overshoot to resuscitate the chances of a 25bps hike this month. Deutsche said that “We expect headline nonfarm payrolls to rise by 200k (vs. +253k previously), with private payroll gains coming in a touch lower at +175k (vs. 230k), both of which are slightly below their three-month average changes (+222k and +182k respectively). However, assuming a modest uptick in participation, the unemployment rate may round up a tenth to 3.5%.”

Deutsche added that “in light of Fed Vice Chair nominee Jefferson's speech this week emphasizing that the Fed skipping a hike 'at a coming meeting' should in no way be viewed as the end of the tightening cycle, it would likely take a meaningful upside surprise for the Fed to go again in June. However, the April JOLTS data earlier this week showed little notable evidence of the type of loosening in labor market conditions that the Fed seeks to relieve inflation pressures. Hence, in our view, an upside surprise and even an in line print would raise prospects for another hike in July.”

“That being said,” Deutsche concluded, “it is worth noting that headline nonfarm payroll gains have surprised to the upside versus the median consensus forecast in twelve out of the last thirteen months. Arguably, the 4k downside miss in March was less a "miss" and more "in line" given the volatility of monthly payroll gains. If this trend continues, and we get an upside surprise on the May CPI report next week, the Fed may have a more difficult time skipping the June meeting, and at minimum would likely signal more strongly that further tightening would be needed in short order.”