The immediate takeaway from this morning's May nonfarm payrolls report is... volatility crush. The various VIX (INDEXCBOE:VIX) futures products are down a few percentage points in the pre-market.
And to top it off, 10-day realized volatility in the S&P 500 (INDEXSP:.INX) is at just four! This implies that even if volatility picks up, it makes sense to be a seller of synthetic volatility products here.
Fundamentally, there's not a whole lot to say about the jobs report. There is continued strong growth from key sectors such as education, health, trade, and transport. There were no outrageous gains from leisure & hospitality or part-time workers. There was a small increase in the labor force and a continued increase in wages (not great, but not slowing), so we're still on the same trajectory that we saw before this report was released.
I do not think this bond movement thus far is indicative of any kind of bias on the results of NFP. I think this action is from delayed buy orders from real money that needs to be long everything now, which is bullish for all US risk assets. Yesterday, every component from the Dow Jones Utility Average (INDEXDJX:DJU) and KBW Bank Index (INDEXSP:BKX) closed positive. That is a very clear message from the market that every asset has further room to run.
That being said, I think bonds are setting up for a good short here to pick up about 15bps in the 10-year, but there are some outside technical concerns that I have to keep in mind:
- The 10-year future (TYU4) is back to overbought from oversold on the hourly chart, after working off the overbought condition created by the futures roll last week.
- The 10-year yield is kissing back against the prior trendline support.
- 124-26/125-02 has been solid resistance for TYU4.
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Traditional jobs-day rules say that you never trade the actual NFP day (which typically has a very tight trading range after the initial reaction) and the following Monday, which is typically an inside day as positions are squared and opinions begin to get expressed.
But since the euro was created in 1999, the historical resistance on the spread between 10-year US Treasuries and German bunds is 120bps, which is where we sit today. This might be the only thing that matters right now. Germany should continue to rally and that might just drag down the US by default.
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There could be delayed buy orders from Europe, or real-money US buyers who are getting long the US since NFP was ho-hum. I don't think this is a short squeeze.
For now, I'll see how things progress in Europe for the next 24 hours as I consider a thematic short in the EURUSD.
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