Intraday Market Thoughts

One Eye on Bonds

by Adam Button
Dec 8, 2013 22:57

The market sent mixed signals on Friday after strong US jobs growth but slowing inflation, we look at what it means. Last week, NZD and CHF led the way while the Japanese yen lagged. The week begins with Chinese trade data.

The bond market is ground zero in the taper wars and the reaction on Friday was telling. Despite excellent jobs numbers, 10-year Treasury yields finished the day 2 basis points lower at 2.85% after touching as high as 2.93%.

There are two schools of thought on:

  1. The economy is picking up but low inflation will prevent the Fed from tapering – a sort-of Goldilocks scenario
  2. The market has priced in and looked past a Dec/Jan taper, and is recognizing it won't mean a rate hike from the Fed
Despite the intraday turnaround in yields it was the highest weekly close since the Fed failed to taper in September. The real test will come later. Can the housing and stock markets survive +3% yields? Can emerging markets survive when the Fed liquidity taps are sealed?

The answer on Friday was a resounding YES but we're skeptical and will be prepared for anything from the Fed on Dec 18 and in the days before.

The post-NFP volatility in the forex market was painful for many but we note that one trade picked a single direction and stuck to it – USD/JPY jumped and then continued higher before stalling ahead of 103.00. That's an important level but the steady reaction is even more important.

Keep an eye on Chinese trade numbers to start the week. Chinese imports are among the first things to lead or lag in the global economy as raw materials are pulled into the country and manufactured. The pace of growth has been generally steady for the past 16 months in the 5-7% y/y  growth range compared to 10-20% in the earlier period. For November data the consensus is 7.0% with exports expected to rise at the same pace.

Friday's post-NFP long in GBPJPY remains in progress in our latest Premium Insights.
Act Exp Prev GMT
Imports (NOV) (y/y)
5.3% 7.2% 7.6% Dec 08 3:36
Exports (NOV) (y/y)
12.7% 7.1% 5.6% Dec 08 3:36

Latest IMTs