May 5. Curve flattens to new low after employment report
–Employment aftermath. Here’s the headline from WSJ about Friday’s report: Jobs Growth Jumps as Economy Gains Steam…U.S. employers in April added jobs at one of the fastest paces of the recovery, rekindling hopes for an upturn strong enough to alleviate the economy’s longstanding ills.
And here’s the Telegraph’s Ambrose Evans Pritchard (AEP): “The US economy has delivered two minor shocks in a week, prompting concerns that bond tapering by the Federal Reserve may be doing more damage than expected. Non-Farm Payrolls data released on Friday shows that the workforce shed 806,000 jobs in April, a stunning drop that cannot plausibly be blamed on the weather. Wage growth and hours worked were both flat and the manufacturing hours per week fell.” Note: AEP cites workers dropping out. From BLS report: “The civilian labor force dropped by 806,000 in April, following an increase of 503,000 in March. The labor force participation rate fell by 0.4% to 62.8% in April.
–So what do the markets think? Immediately after the data the WSJ theme was embraced. But by the end of the day the latter viewpoint prevailed; 2/10 made a new low of 216.5 (-3.5 on day and 7 bps on the week), 5/30 made a new low just under 170. Red/gold euro$ pack spread plunged 8 bps to just under 245. 30 yr bond futures made new highs, yield dropped 4 to 336.5. Stocks were nearly unchanged. The other theme that is probably partially responsible for the relentless bid in the long end is lack of wage growth and the deflationary pall cast by China’s weakening currency and economic slowdown. With China’s economy now nearing the size of the US, the prospect of much slower growth will send shockwaves through the developed markets. Consider these quotes from one of China’s top real estate developers: “In 1990, Tokyo’s total land value accounts for 63.3pc of US GDP, while Hong Kong reached 66.3pc in 1997. Now, the total land value in Beijing is 61.6pc of US GDP, a dangerous level,” said Mr Mao. …Mr Mao said China’s house production per 1,000 head of population reached 35 in 2011. The figure is below 12 in most developed economies “even when the housing market is hot; no country has a figure of greater than 14”.
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100027199/chinese-anatomy-of-a-property-boom-on-its-last-legs/
–Volume in the interest rate complex was extremely heavy Friday, with all futures contracts posting sizable gains in open interest. For example ten year OI was up 41k. In spite of what may be considered as tinder for the next big move, implied vol declined. For example, TYM 124.5^ settled 1’00 from 1’12 Thursday with futures unch’d. TYN straddle from 1’47 to 1’40. With two weeks left until expiration, Green May 9837^ settled 12.5, and Blue May 9737^ settled 14.5, this with Friday’s ranges having been 14.5 in EDM6 and 19.0 in EDM7. Given that action late Friday had dwindled to a barely audible hum, perhaps the premium levels are appropriate. However, Yellen is in front of Congress on Wednesday, and of course the Russia/Ukraine situation is still simmering.
–There was one very large euro$ trade worth mention…new position. Seller of 80k 0EN 9900/9875ps 3.0 vs buyer 40k each 2EN 9775/9750ps 6.0 and 3EN 9687/9662ps 6.5. Steepener.
