Let’s tweak NFP for Labor Day
September 2, 2022
–30y yield ended 3.371, just 5.6 bps away from the year’s high at 3.427. On a continuous US1 futures chart, the low for US on June 14 was 132-09. USZ2 settled yesterday at 133-18. Near ED calendars made new highs, but the lowest one-year spreads remain deeply inverted, EDM3/M4 is -68 and SFRM3/M4 is -67. The market clings to the idea of a Fed pivot even after Powell’s forceful Jackson Hole speech. Lowest SOFR contract is SFRH3 at 9607, and the lowest FF contracts are April and May ’23 at 9604.5. Timing for the terminal rate has been pushed out slightly in time, as witnessed by the widening spreads between Z2 and H3 contracts to new recent highs (14.0s in SOFR). Peak rate is projected at 150 to 175 higher than now, which would put EFFR at 383 to 408. If the Fed were to hike 75 at the Sept 21 meeting, a downshift to increments of 25 to 50 is likely.
–Having said that, there was a new buyer of 30k SFRZ2 9600/9575/9550p fly for 3-3.25 yesterday. Settled 3.0 vs 9621. This trade favors more of the “front-load”.
–Curve bear steepened yesterday. Two-yr yield +7.2 to 3.518%, ten-yr +13.2 to 3.263%.
–NFP today expected 300k. Unemp rate still 3.5%. Avg Hourly Earnings expected 5.3%. I saw a clip on ZH saying that a low NFP would be taken as positive by equities. Maybe initially…but while a low number might spark a pullback in USD and ease some of the pressure on the short end, long bonds probably won’t have a sustained bounce. The long end of the curve is destined to become a much more important factor in terms of tighter (or looser) financial conditions.
