Bunds fall on strong ADP

A very strong ADP number pushed bonds down hard across the curve as signs the labour market may be picking up. Bunds traded down 80 ticks from pre release and is currently trading at 125.49. Euribor spreads as you would expect rose slightly too, with the front end spreads moving up the most. ADP the precursor to the main US non farm payrolls, however has been off the mark in recent readings, so still waiting to see if this is confirmed on friday. Anything other then a good topside number should see some profit taking, but as pointed out in the previous post, given the decline in weekly jobless claims coupled with ADP suggests we could get a very big number. Here are two different views from Knight capital and Goldman Sachs:
From Knight's Brian Yelvington:

ADP, the best (and really only) predictor of Friday’s monthly jobs data, printed at a very high 297K gain for December versus expectations of a 100K gain. We have noted before that “best” here is a pretty low bar and the ADP report should be considered in its own right, and not just a forward look at the official numbers. ADP overestimated November’s jobs data (by 43K), but underestimated the prior 6 months (average difference of 55K).

That being said, the 297K print is hard to argue with. 270K of the jobs were in the services sector, so this raises expectations for the ISM Non-Manufacturing number due out at 10AM. We will closely watch this number for confirmation of the ADP data, but there is historically not a huge basis to argue with the number. Even adjusting for holidays and noting the service bias, it is not out of line. Service jobs accounted for about 97% of ADP December job gains and 84% of all ADP prints over the past five years. A confirming ISM number at 10AM will significantly raise expectations and estimates for Friday.
And from Goldman:

MAIN POINTS:
1. The monthly ADP employment report surprised sharply to the upside in December, posting a gain of 297,000 jobs versus consensus expectations of 100,000. This is the best ADP reading currently on record (the official data go back to January 2001, though the series has only been released publicly since 2006). Notably, the initial report for June 2006-since revised-was +368k, which substantially overstated the comparable BLS first print of +90k.

2. The bulk of the December 2010 surprise came from small- and medium-sized service sector firms (+120k and +123k respectively, up from +48k and +30k in November). Goods sector employment growth was still soft, with manufacturing up 23,000 (vs +15k in November) and construction up 6,000 (vs. +10k in November). ADP's estimate of financial sector employment was down 6,000, versus a gain of 2,000 in November.

3. The ADP data have a special quirk that could have affected today's report. ADP records payrolls based on the number of names on the payroll-regardless of how many hours they work during the week. Not every firm immediately "cleans" payrolls when an employee quits or is laid off; in some cases, it can take until the end of the year for the payroll list to be officially updated. This creates a lot of volatility in the December report in particular. In theory, one would expect greater purging in payrolls in bad years (like 2008 and 2009) and less in relatively better years (2010 was hardly spectacular, but at least payrolls were up on the year). Of course, the official report attempts to adjust for this behavior, but if 2010 saw relatively less purging than the sample period, it's possible some of today's improvement could be the result of this data quirk rather than genuine acceleration. Given the potential for an overstatement, we have put a -1 judgmental adjustment on our US-MAP reading, which still records a significant upside surprise.

4. Luckily, we will have a useful cross-check of the ADP report later on this morning. If service-sector employment really is accelerating sharply, we'd expect to see the employment index of the ISM non-manufacturing survey (which was 52.7 last month) post a meaningful increase. This report will be released at 10am and will help us gauge how much weight to put on the very strong ADP report.

New year starts with a bang

2011 has started of on a positive not for stocks, as we hit triple digit gains on the Dow and as of now we are higher once again.
Bonds as you expect have come off, Euribor spreads have been fairly flat as of now, with a slight bias on the short side as the front end is seeing most of the selling.
I've started of my trading on the cautious side as I try evaluate where we stand. I managed to short 25s in dec11-mar12 short sterling to nick a tick, and sold some 29s in the sep12-dec12 spread. It all seems a bit flat now so going to wait for the afternoon, to look for more opportunities.
I think Fridays non farm payroll report will really set the scene for this month. I would expect a much better number then last month as we have been seeing improving weekly jobless claims, and last week we hit below the 400k mark for the first time in over a year.

In other news, it looks like facebooks world domination continues, as they have added Goldman Sachs to their list of investors. This puts Goldman in prime position should facebook do an IPO this year. Clever thinking indeed. The Goldman investment values FB at 50 billion dollars! A bit far fetched it seems, but it doesn't look like the growth of the company is slowing down any time soon.

10 year Bunds under pressure

Over the last five days both Bunds and US Ten Years have come under pressure on the back of a rebound in equities. The catalyst for this move was some surprisingly strong data out of the manufacturing sector followed by a good payrolls number. This week there is little to get excited about except the latest rate decision from the BOE.
From a technical perspective the Bund shorter term outlook has become more balanced following the aggressive sell-off last week. The Sept. contract reached lows of 131.73 before achieving a slight rebound yesterday. This low perfectly matches the target of the small daily double top formation formed the previous week an indication that the concerted selling could be over for the time being. It is also worth noting that from today volume has switched to the Dec. contract providing a large contract gap. In recent times we have seen these closed within the first few weeks of the new contract, if this is to be achieved again the target price is 131.73 (Dec.).

Last week the macro releases proved culminating in some strong jobs data out of the US on Friday. The US payrolls numbers showed that only 54K jobs were lost compared to expectations of -90K. The Private Payrolls number also surprised to the upside coming in at 67K against expectations of a 40K print. Although these number were not exceptional Bunds and US Ten Years found themselves under pressure. We doubt that these recent strong figure will spell an end to a deterioration jobs market in the US and we expect further weakness to occur throughout the rest of 2010.


This morning the WSJ printed an article which stated that recent disclosures by European banks showed they did not provide a comprehensive disclosure of government debt holdings during the European stress tests. This revelation resulted in a strong rally in the Bund as spreads against European peripherals widened. This story will likely develop during the week and gather further interest.

Euribor curve continues to flatten

The Euribor curve continues its flattening as European economic woes continue, recent comments out of Hungary stating that they are at risk of default further put pressure on the Euro and put a bid to the bond markets. Euribor spreads have been narrowing as the back end has been bought up and the front end has been sold off as Libor rates continue to rise as a result front month spreads are edging closer to zero.
June Schatz traded above 110 and Bunds were in touching distance of the 130 level, which mathematically seems to make no sense, but investors are pouring in into safer government assets as risk appetite is dwindling.
Looking forward, it seems that the fear of spiralling debt levels will continue to keep this market on edge. We likely to see continued volatility to day to day changes in news and country situations, as well as continuing changes in debt ratings for European countries.
I continue to only keep intra day positions and be flat over night as overnight risk remains high.

Bond analysis

Overview

Over the last 5 trading sessions we have seen the bund move sharply lower touching a recent low of 122.53 last Thursday. This move appears to have been led by the US Ten Year which came under pressure on the back of three poor auctions.

From a technical perspective we have seen a significant shift in the Bund over the last week. The failure to complete the contract gap close has seen the market quickly lose ground and it now appears to be forming a potential bear flag. Yesterday it tested the 50% retracement of the recent down move (123.13) but quickly lost ground. As long as the Bund holds below here a bear flag formation remains technically sound. A break of 122.54 would confirm the downside momentum and would most likely see a challenge of the June contract low at 122.07. The US Ten Year has also shifted dramatically to the bearish side. Since the June contract became the front month the market has been under extreme pressure taking out key support at 116.285. Like the Bund we may see the development of a daily bear flag over the next few days. If this proved to be the case a downside break would be tested by support at 114.285 and 114.080.
This week we will see the latest jobs data released out of the US. It is expected to show the strongest results for over two years, an outcome that may see some fixed income bulls grow nervous. The figure is expected around +190k but if, hypothetically, we were to see a print above 300k it may lead some participants to be concerned over the timing of Fed’s interest rate hikes. There would likely be pricing in of a change in language at the next FOMC meeting, away from the extended period terminology to something more hawkish. For this reason it is likely that fixed income will remain under pressure this week as fears of a stellar NFP paralyse bulls.
Last week the US had three treasury auctions all of which were met with poor demand resulting in higher yields. On both the 5 and 7 year the US Ten Year dropped over half a point, and at the time this seemed extreme. In retrospect this highlights the concerns that still remain regarding the US’s ability to pay for its extreme levels of spending. Auctions will be under particular scrutiny over the next few weeks as traders look for signs of further weakness.

Short Sterling technicals

June10 has resistance at 99.28 if we move above 99.26. Below support at 99.23 sees buyers entering at the lower
end of the range at 99.21/20.

Sept10 struggling at 99.10. Once through 99.11 we can look for the contract highs of 99.15. Good support remains
at 99.06/05 but a break lower is possible and would target 99.025/02 for a buying opportunity.

Dec10 broke lower to hit our support at 98.76. A break of 98.75 is now possible and would take us to 98.725/72.
Expect a bounce from here to take us to 98.80 initially. If 98.76 holds we could bounce to 98.80 followed by
98.83/84. In the longer term this market now looks weakened so a bounce could be a selling opportunity.

March11 plunged to our support at 98.41. In the longer term this market is looking weaker but for today there is
good support down to 98.40. A bounce from here would target 98.45 then 98.47/48. A break below 98.38/37 is
a worry and should take us to 98.33/32 and could stretch to 98.29/28.

Greece announces Austerity measures

The Euro has been catching a bid on the back of news on reuters:
• RTRS-GREEK CABINET DECIDED ON EXTRA AUSTERITY MEASURES OF 4.8 BLN EUROS- GOVT SOURCE 09:00GMT
• RTRS-GREEK CABINET DECIDED TO RAISE VAT TAX BY 2 PCT POINTS TO 21 PCT- SOURCE
• RTRS-GREEK CABINET DECIDED TO TRIM SALARY BONUSES BY 30 PCT IN 2010- SOURCE
• RTRS-GREEK CABINET DECIDED TO FREEZE STATE PENSIONS IN 2010- SOURCE