Feb 7. Employment day
Feb 7. Yields pressed a bit higher in front of today’s employment data with NFP expected 180k, rate of 6.7 to 6.6. Tens rose just over 3 bps to 2.70. Longer end of the curve displayed the most weakness with golds down 5.75 and greens down just under 3. Option trading reflected a (measured) bearish bias. For example a new seller of 40k 0EM 9950c at 6.5 and a buyer of 0EU 9925/9875/9862 p 2x3x3 for 8.5. Taken together (not that they were done as part of the same package), there would be a small premium credit and a reasonable delta short in EDU5, and with EDH5 at 9955 even the curve roll shouldn’t be a big problem for the June calls that were sold.
–Draghi’s inaction on further easing led to a jarring rally in the euro and pushed bunds down.
–China HSBC Service PMI at 50.7 is lowest since August 11. I haven’t been strongly in the deflation camp, having thought better US growth would lead to wage gains, but I looked at a few industrial products yesterday, rubber, nickel, aluminum, zinc…all at or near multi year lows. Primary use for rubber is tires, but according to a Bloomberg story China’s rapid ascent to 20 million vehicle sales is expected to stall. Reuters has a post on Daimler being concerned about slowing sales in emerging markets. The yuan is easing slightly, a response to Japan’s yen depreciation as a result of explosive QE? The point is that Japan has been a catalyst for deflationary export pricing in Asia, with many analysts continuing to warn of a negative price spiral looming over Europe especially. Negative unit labor cost data out of the US yesterday also a concern.
