Friday, April 04, 2008

They're digging in the wrong place!

I'm shocked by the bond markets initial reaction to the non-farm payroll report. As I write this the 10-year is up about 1/8 and the 2-year is flat. I would have guessed the 10-year to jump 1/2 a point given the NFP result. I'd also have expected a steepener, not a flattener.

Meanwhile stock futures are holding in OK, mildly positive.

Personally I've always felt that NFP was an over-rated statistic. Job growth is a well-known lagging indicator, whereas investment markets tend to be forward indicators. So as an investor, you'd think the NFP number isn't very useful. Despite this, the market continues to put a high value on the release, so you're left with little choice but to follow it closely yourself.

The way I handle it is to ignore jobs figures when thinking about longer-term moves, but when timing your moves, you can't ignore the first Friday of the month.

Anyway, credit spreads continue to move tighter. The CDX was in 9bps over night. I suppose that's the bigger deal, and that's why the Treasury market isn't able to move higher, at least at the outset.

If Treasuries were to finish lower today, I think that would be a very bearish signal for rates.


Anonymous said...

AI, can you tell me what the high yield spread is? Did we reach the 1,000 basis point spread over Treasuries that usually indicates the bottom? How would I find out this spread? Thanks

Anonymous said...

That's the 64 thousand dollar question:

Can employment be ignored?

Accrued Interest said...

BTW I spoke too soon on the 10-year, now up about 3/4 of a point. That's more in line with what I expected.

HY spreads are currently about 730 according to Lehman. The recent high was 831 (Bear Stearns bailout day). The 2002 high was 1036.

Accrued Interest said...

As for unemployment, the historic data supports unemployment as a lagging indicator, especially for recoveries. Some data supports unemployment as a conincident indicator during recession.

From October 1999 to December 2000, the unemployment rate was between 4.1 and 3.9 every month. During the official recession, March-November 2001, unemployment moved from 4.3 to 5.5.

Interestingly, employment kept getting worse after the recession was over. Unemployment actually peaked in June 2003 at 6.3%, two full years after the recession was over.

So what's my point? The utility of an economic indicator, as a trader, can come in two ways. Either the number has predictive value, or correctly predicting the number can indicate how to trade the market. In other words, either you can use the number as an input predict future events. Or you can try to predict the number itself and then trade the market accordingly.

The 2001 recession shows that unemployment fits neither bill. Unemployment did not start to tick up until after the stock market had already started to fall. And unemployment kept getting worse well after the stock market had bottomed.

Anonymous said...

I think you could make the case that unemployment will be more predictive of where the economy is headed than in 2001. This time around it could be the straw that breaks the consumer's back.

They are already losing equity in their homes, struggling to finance their debt, and worried about rising costs. Add job insecurity and we may finally see the American consumer rollover. And that's 2/3 of the economy.

I can't see a rational explanation for the market behavior this week. The "logic" seems to be that all the news is SO bad that it must be a bottom.

It's not trying to catch a falling knife, it's a katana being driven down by a very muscular Samurai. People are going to lose their fingers, or worse.

Anonymous said...

"Official" recession was over before 2001 ended, but what markets did after 2001 are more relevant:

- Credit markets continued to fall, bottoming in late 2002.
- Equity markets continued to fall until 1Q 2003.

Anonymous said...

Hey, what gives? This blog is supposed to have geeky Star Wars references. "They're digging in the wrong place!" is clearly an Indiana Jones reference.

Accrued Interest said...

Ahh... somebody noticed...