Here’s a quick preview from Jill Mislinski of advisorperspectives.com: 

The economic mover and shaker this week is Friday’s employment report from the Bureau of Labor Statistics. This monthly report contains a wealth of data for economists, the most publicized being the month-over-month change in Total Nonfarm Employment (the PAYEMS series in the FRED repository). Today we have the ADP November estimate of 190K new nonfarm private employment jobs, a decrease over October’s 235K.

The 190K estimate came in above the Investing.com consensus of 185K for the ADP number.

The Investing.com forecast for the forthcoming BLS report is for 200K nonfarm new jobs (the actual PAYEMS number) and the unemployment rate to remain at 4.1%.

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The bond market has been quite strong so far this month, especially the long end(TLT).  Could be the expectation of a disappointing report tomorrow morning.  If the jobs news is well above expectation we expect quite a bit of volatility in the bonds.  A viscous sell off could follow. 

On the subject of bonds, Bob von Halle sheds some light.  Great stuff here:

Despite my current role as an equity options trader, I remain a bond geek at heart, given the 25+ years I spent on the institutional side of that business. Rarely have I been more perplexed by the trading pattern of the long end of the treasury yield curve, captured by the price action of the TLT exchange traded fund. Much as been written about the flattening yield curve with short term rates (out to 5 years) having risen precipitously, while the 10 year treasury stays locked in around 2.35% and the 30 year treasury yield dropping through former resistance of 2.75% (represented by 127.25 zone on the TLT). The 5 yr to 10 yr spread is approaching 20 basis points, while the 10yr to 30 yr. spread is approaching 40 basis points.

The flattening of the yield curve driven by the short maturities makes total sense in the context of the Fed being poised to aggressively continue their fed funds rate increase campaign in 2018. The 10 year part of the curve remains well anchored by the wide spread vs foreign government 10 year maturities ( e.g. Germany at .30%, France at .65% and England at 1.25%) triggering strong overseas buying of U.S. Treasuries, irrespective of currency movements. It is the 30 year area that is a conundrum to many of us. The arguments being made are low inflation and geopolitical risks that might trigger a flight to quality/safety on U.S. treasuries (among other arguments).

The latter point was driven home by a sudden 2 point spike in the 30 year bond in a matter of seconds last week on the Flynn guilty plea/implicate Trump thesis, that receded just a few minutes later. Rarely have I seen a price reaction that violent in recent memory. The former point is dubious in my opinion as labor costs (the largest component of most company cost structures) seems poised to rise dramatically in coming year(s) given the tightness in the labor market (despite this weeks subdued employment cost index reading). Then factor in the prospects for a trillion dollar addition to our nation’s deficit over the next decade should some version of the current tax law proposals make it into law. The supply of government bonds will be staggering and certainly require higher long term yields to attract enough buyers. None of this stuff seems to matter at the moment…..why???
Once again, ALGOs RULE! With Wall Street dealers retreating from their traditional role as market makers (onerous capital requirements), computer programs have taken over and they worship solely at the alter of price movement, not from any sort of economic logic. Simply put, they buy what is going higher in price and sell what is moving lower endlessly until it stops working. That has yet to happen, and probably won’t following tomorrow’s Employment report. However…..
Someone(s) out there agree with me, as there has been huge buying today o fthe Jan 19th expiration 33 calls in the TBT (Ultra short inverse 20 year treasury ETF). Almost 30,000 contracts have been bought around the $1.15 area with TBT trading approx at $33.5. TBT moves UP in price as the 30 year Treasury moves DOWN in price (higher yields), as its “inverse” name implies, and on a leveraged basis.   This is a huge trade in the options market, and clearly is a bet (or hedge) on higher long term rates.
Full disclosure: I am short TLT in my trading account, and am looking to add to that position on continued strength.

 

Hat tip advisorperspectives.com