June 6. Employment report. Initial signs for ECB cut don’t look promising
–Employment report today with NFP expected +215k, rate 6.4 to 6.5 and Avg Hourly Earnings +0.2.
–ECB announced a range of easing measures including negative deposit rate, targeted LTRO, etc. Japan has been a bit more successful with manufacturing inflation, mostly thru currency depreciation. On that score, initial signs don’t look great for the ECB as the euro initially plunged to a new recent low near 135, but then snapped back to 136.20. EURJPY had been edging lower, threatening to break below 200 day MA but rallied yesterday and has held for now. As an aside CNY (yuan) is holding above 6.25, a new leg lower (i.e. CNY up trading thru 6.27) would signal continued deflationary pressure for developed economies as Asian exports get cheaper. If EUR can’t manage to depreciate against Asia and the US, then prospects for a big pick-up in inflation are muted.
–US interest rate futures traded much like EUR, initially breaking down as TYU tested 124-00, the 50% retrace level of April low to last week’s high, had an outside day and closed higher. Anything can happen on payroll day, but 2.68 is line in the sand for me, approximately the 123.5 strike. Implied vol was hit, with TYU 124.5^ going from 2’17 prior to ECB to 2’11 at close, 4.8 vol, -0.2. The week-2 124.5^ that expires with June midcurves next Friday, settled at just 49/64’s, from 58/59 late Wednesday. 49 is worth about 10 bps, vs 14.0 settled fro Blue June 9750 straddle. To me, the risk appears to be that a lower than expected payroll number will be met with new waves of buying.
