Not only was employment growth during May half as anemic as earlier thought but June was also equally dismal. The biggest question running repeatedly through my mind is exactly how Thursday's ADP report managed to once again steer everyone in precisely the wrong direction. The official employment report for June was unambiguously bad with private, manufacturing and even government payroll data shockingly ugly. We can take solace in two facts. We can still rely on weekly initial claims data as a better forward-looking indicator for the trajectory of unemployment trends. Readings above 400,000 each week simply won't do in terms of driving the economy forward. Second, Chairman Bernanke's prediction that the decline in unemployment will prove to be “painfully slow” is turning out to be remarkably astute.
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Eurodollar futures – In the blink of an eye at 8:30am on Friday equity index futures plunged while Eurodollar and Treasury future surged in price driving the yield curve lower in response to news of a measly 18,000 increase in June payrolls. That pace was the weakest in nine months while private sector hiring of 57,000 was the least since May 2010 and contrasts with Thursday’s ADP reflection on 157,000 new positions. Service providers added 14,000 new positions – the least since September while construction employers added 9,000 jobs and retailers added 5,200 positions. The number of workers in the government sector fell for an eighth straight month and by 39,000. The concern for the economy now is that the Fed’s projected second-half recovery might not be as strong as projected or it might simply not show up at all. Bond prices advanced by more than one full point and enough to shave 10 basis points off the 10-year yield, which slid to 3.04%. Eurodollar futures expiring beyond June 2013 surged with implied yields slumping by 18 basis points as the yield curve flattened.
European bond markets – The European bond markets were mixed on Friday but the trading pattern remained similar to that of recent weeks as peripheral spreads widened on fears that the Eurozone is shortly likely to stage its first sovereign debt default. Portuguese, Irish and Greek benchmark yields rose while concern over the health of the Italian economy drove its premium over German bunds to a nine-year high. An industrial production dip turned into a slump in activity fueling concerns of an economic downturn before monetary tightening at the ECB has even had time to have an impact. German bunds were in positive territory pretty much from the start of trading only to see an acceleration in the move after the U.S. report caused consternation that growth is set to disappoint. German bunds advanced by more than a full point matching a double-digit slide in U.S. yields with the European benchmark sliding to 2.85%.
Japanese bonds –The yield curve in Japan remained little changed despite advancing regional equity
prices and as political gridlock provided little end to the wait for a fresh grand supply of bonds in order to finance the post-tsunami reconstruction of the nation. September JGBs declined by 16 ticks to 140.54 while the benchmark cash rate remained unchanged at 1.16%.
Canadian bills –Canadian bills of acceptance dipped in response to a stronger reading for Canadian employment during June when employers added 28,400 new positions. However, the yield curve later declined after the non-farm payroll report weighed on investors’ projections for global growth. Implied yields on bills slid by seven basis points and widening the range for the session to 13 basis points illustrating the policy bond the Bank of Canada finds itself in. Without the engine of growth south of the border purring at a regular speed, the Canadians are having a hard time gaining any traction. The Canadian 10-year government bond future rose to 125.26 for a 70 tick gain on the session leading the yield six basis points lower to 2.99%.
Australian bills – Aussie bill futures were unchanged overnight yet advanced by six ticks in response to the U.S. employment report. Stocks around the Pacific Rim continued to advance in light of growing confidence that the Chinese authorities are unlikely to raise interest rates any further throughout 2011. Central bank Governor Zhou Xiaochuan told an audience that China must not focus only on inflation but should also consider growth, employment and the exchange rate when setting its monetary policy. Aussie government bonds bled five basis points in yield to 5.13% in to the weekend.
British gilts – Short sterling futures were edging lower ahead of the U.S. employment report as dealers grew concerned that a positive reading would spark a further rally for risk that would dim the appeal of fixed income. Positive sentiment towards short sterling wore off despite a relatively friendly reading for producer prices where the monthly cost of goods leaving the factory gate fell to its slowest pace in nine months offering an olive branch between the doves and hawks at the bank of England. After the U.S. labor market data disappointment short sterling prices reached session highs where implied yields declined by up to 11 basis points at some deferred contracts. The September gilt future shot higher by 90 ticks lowering the yield by eight basis points to 3.21%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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