The focal point of the week--this morning's Employment Situation report--fully delivered on its anticipated role as a big market mover. In this case, markets were on the right side of the pre-NFP hedge seen in the form of Wednesday and Thursday's seemingly aggressive rallies on weaker ancillary employment data and self-sustaining tradeflow momentum. After today's huge miss of the consensus in NFP (88k vs 200k forecast), those previous rallies don't seem so aggressive in hindsight. Additionally, if this morning's rally was any sort of knee-jerk, we'd likely not still be holding remarkably close to the initial highs in MBS (or lows in terms of Treasury yields).
A massive amount of "up in coupon" angst has been released over the past three days and it looks like we're still range-finding and fine tuning. In other words, both in Treasuries and MBS, the majority sentiment was to sell longer duration fixed income securities and buy shorter duration. In Treasuries, that's a "steepener," and in MBS, "up in coupon" (because higher coupons have shorter durations). That sentiment had been pervasive, but recently began unwinding, like a cattle drive that starts to veer off course. The herd started to gallop (does cattle gallop or is that just a horse thing?) on Wednesday morning and after 2 and a half days of running full tilt, we're stopping to explore these greener pastures.
The grass and water here may be readily digestible or may suggest this to be a pasture too far. We're still waiting to see the extent to which short covering in Treasuries plays out before we can know more about that, but the move has clearly been good for MBS, which have outperformed the Treasury yield curve considerably (again... this is pay back time for the last few months of angst, and we haven't even made it half-way back to January's levels of relative performance).
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But again, anything that happened before this morning's NFP data is sort of at moot point. This probably would have been the case regardless of the size of the miss, but with the miss being on the "huge" side, it's doubly true.
Since the report, MBS moved up a quick 18 ticks in Fannie 3.0s to 104-17 and have settled in a range between 104-13 and 104-19. 10yr yields shot lower to 1.685 from 1.75 and have carved out a range from those initial lows to 1.71. 10's are currently 6.5bps lower on the day at 1.70 and Fannie 3.0s are up 17 ticks at 104-16.
The rest of the day is about "position cleanup," meaning that the trading positions that existed heading into NFP, and the changes to them resulting from the post-NFP trade, will be the most significant market movement factor from here on out. Positive and negative interpretations are well-balanced for now with 10yr yields having made a clear "double top" and "double bottom" on either side of their 1.71-1.685 micro range, post-data. This is perhaps an early indication that the so-called "clean-up" has been faster than it it otherwise might be (which wouldn't be too hard to imagine considering that tradeflows and position adjustments were a large part of the last two days of trading.
The implications of getting the tradelow picture sorted out quickly, are good for MBS. The more stable that 10's can be, the easier it is for MBS to keep pace with the rally (something they're already doing a great job of, as we predicted in the Day Ahead). Breaks to either side of the morning micro range aren't necessarily technically significant at this point, and unless we get a higher volume flush to mid 1.6's in 10yr yields, we've likely seen the bulk of the short-coverers get, well... covered.
- Lowest NFP since June 2012 - Last month revised up to 268k vs 236 initially
- Private Payrolls 95k vs 209k consensus
- U/E 7.6%, lowest since Dec 2008
- U/E accounted for by drop in participation rate
- at 63.3, participation rate is lowest since 1979
Market Reaction: Initial pop to the upside for MBS prices of roughly half a point and a 6-7 bps drop in 10yr yields. 10's leveling off between 1.69 / 1.70 and MBS around 104-14 in Fannie 3.0s.
Nonfarm payroll employment edged up in March (+88,000), and the unemployment rate was little changed at 7.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment grew in professional and business services and in health care but declined in retail trade.
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