November 2. Employment Report. Keeping it REAL
–Employment report today expected 3.7% with non-farms 200k and yoy Avg Hourly Earnings 3.1%. Last year’s AHE was abnormally low at 2.3, so off a low base, today’s wage number is expected to be solid. A story on ZH notes that many consumer prices have been, or on the verge of being raised, which will cause an inflationary acceleration. However, inflation breakevens as indicated by tip vs treasury spread, are slightly compressing, with yesterday’s inflation-index to ten year spread at 203 bps, down from 217-219 at the beginning of February. The chart below tells the story. NEW HIGH yesterday on the ten year inflation indexed yield to nearly 111 bps! This is an increase of about 60 bps since the start of the year. Why? For a long time the Fed was content to see real yields in negative territory. What has caused ‘real’ rates to surge 40 bps over the last two months? My thesis is that investors are being more discriminating. If that is correct (and if I am wrong or there are technical reasons for this move please let me know) then it has fairly large implications across markets. Real rates low, forced into risk. Real rates high, then competition for investment flows increases.
–Today’s story is pretty simple. Stocks have vaulted higher, in spite of AAPL’s immediate $11 decline post-earnings, due to news summed up in this BBG headline: Trumps Asks Cabinet to Draft Possible Trade Deal With China. Possible deal and a strong employment number means higher yields. Oh, and ‘surprise!’ CNY has backed off from threatening 7. For the last couple of days there has been fairly sizable buying of Week-2 TY puts (Nov 9 expiry, which covers the midterms). On Tuesday 118.25p for 13 vs 118-27 and yesterday 118.0p for 14, 25k cov 118-13. Currently 118-12 in the contract. High gamma puts could cause downside acceleration if the initial buyer isn’t trying to immediately monetize gains.
–Flying in the face of the inflation narrative is recent price action in WTI-Crude. Late yesterday i was down 1.80 to 63.51 (CLZ8) and shows no bounce this morning. Important area to try to hold.
