Feb 8. What do the models say?
NFP weaker than expected at 151k but yoy wage growth of 2.5% resurrected the idea of a tightening campaign. The front end saw selling pressure in response, with EDU6 and EDZ6 (weakest contracts on the day) falling 3.5. However, the curve flattened, with EDU8 and EDZ8 unchanged on the day, and further contracts in positive territory. The ten year yield eased 1.4 bps to 184.6. Equity markets aren’t particularly enthused about the idea of further rate hikes, with SPX -1.85% and Nasdaq -3.25% on the day; much of the losses coming after Obama took a victory lap touting improvements in the labor market.
–Once again, calendar spreads in dollars made new lows. Red/green pack spread (2nd to 3rd year) fell 1.875 bps to a new low of just 33.25.
–China reported a monthly decline of nearly $100 billion in fx reserves. I’m not sure what the ramifications are, but my guess is that a similar amount of money flowed out of the country into investment markets globally, probably indirectly benefiting treasuries. What happens on a devaluation? Does that flow stop?
–Focus this week will be on Yellen’s Congressional testimony beginning Wednesday. We’ll probably get a nice summary of what the models say. Just remember, the models also went with Carolina.
