At sea, looking for a tide; Fitch puzzles
It is August, it’s Friday, and we are in the last hour before the latest NFP data (see Deutsche below). So it is no surprise to hear that USD fixed income trading has so far been quiet today.
Moves in USTs have been extremely limited as they mostly have elsewhere,.. although Bunds are trying to make a move with a 4bps rise in yield in what EUR traders call a continuation of yesterday’s sell-off (see EUR Swaps: BOE eyed; Front ASWs lead widening).
The 10y gilt yield is currently +2bps while in a UST market that is fully-clenched ahead of NFP, the 10y yield is +2bps at 4.19% while 2s/10s has bear-flattened 3bps and 10s/30s has flattened 2.5bps. The front end looks particularly weak today. UST traders couldn’t specifically explain this but the fact that the front end has sold off the day after Elon Mus and Warren Buffett both recommended T-bills cannot simply be coincidence.
Looking at NFP today one UST trader said in London this morning that “NFP doesn’t feel as big as some other recent ones have. But the market does seem to be in a malaise with nowhere to go after yesterday’s move so it might just provide a bit of that, which would be welcome.” The 10y UST yield is currently almost 25bps up from a week ago.
In the 30 minutes left before NFP the trader said that there was little outstanding flow since this morning, when Asian buyers were dip-buying in the front-end.
Reflecting on one the stories that grabbed the imagination this week, particularly the imaginations of people who like to catastrophize, was the downgrade of the venerable USofA’s treasured AAA rating by Fitch, to AA+.
The above trader said that “in a week no-one’s going to remember this. But it was extremely peculiar. A year ago Fitch set out a checklist of what the US had to do to maintain its AAA rating, focusing on growth and debt targets. The US has met each of the criteria Fitch listed and now it’s grabbed loads of headlines for itself by downgrading it anyway. Odd…”
With NFP looming swap spreads are quietly flattening in the front end, and doing little elsewhere. At the time of writing the 2y is +0.5bps at -9.25bps, 5y is -0.125bps at -21.125bps, 10y is -0.125bps at -27.75bps and 30y is -0.25bps at -66.00bps.
Deutsche: NFP’s devil is in the detail
Strategists at Deutsche Bank took a last-gasp look at the upcoming NFP this morning, deciding that this time it’s not all about the headlines. Deutsche said though that as far as the headline goes “while we expect some payback from state and local government education hiring on headline (+175k forecast vs. +209k previously), we expect a slight pick up in private (+175k vs. +149k) payrolls.
The average forecast for the July NFP data is 200K versus that 209K figure in June, while the average private payrolls headline forecast is +180K.
Deutsche continues: “to be sure, our forecasts would still be below the three-month averages for headline (244k) and private (196k) payrolls gains. This pace of hiring should keep the unemployment rate steady at 3.6%. Though we expect hours worked (34.4hrs vs. 34.4hrs) to remain unchanged, it is possible that elevated temperatures across parts of the US may result in a tenth decline in the average workweek. Either way, if our forecast for average hourly earnings (+0.3% vs. +0.3%) is close to the mark, the implied year-over-year growth rate of our payroll proxy for nominal income (specifically, the compensation component) would fall by roughly 40bps to 5.9%.”
It concludes that “we cannot overstate the importance of looking at the totality of the employment report and caution against focusing on just the nonfarm payroll change. Hours worked and average hourly earnings are equally as important because of what they say about the trend in income growth and economic activity. Income growth will be key to the strength of consumer spending over the next several quarters given the array of headwinds households will be facing in the back half of 2023.”