Non Farm Payroll Oct 8th

"Today, all eyes are on the US payrolls report. After three consecutive months of declining payrolls, the headline figure is forecasted to come out flat in September. As the overall figure will still feel the consequences of the 2010 Census, we continue to favour the private payrolls for our analysis. In September, private payrolls are forecasted to have risen by 75 000, slightly better than last month’s 67 000 increase. Based on the weekly claims, the risks might be on the upside of expectations. However, the ADP report showed an unexpected decline in September (by 39 000) and the ISM registered a worsening in the employment index.

Besides that, <b>September is traditionally a bad month for the payrolls report as in the last 25 years, the report showed only 5 upward surprises and 20 negative ones.</b> All arguments taken into account, we believe that the risks for a weaker report outweigh. The payrolls re-port will be closely watched by the US Federal Reserve, but we believe that only an incredibly stronger report, which is very unlikely, can prevent the Fed from running into QE2.

Regarding markets, the payrolls will be decisive. A downward surprise, let’s say private payrolls flat to +10 000, is intrinsically Treasury-friendly. It would also galvanise expectations that QE-2 will soon (November?) be decided and implemented. So Treasuries would get a boost, but we are a bit afraid of profit taking after the initial boost.

Bonds have rallied on the QE theme for a few weeks now and there have also been good gains this week which may convince some traders to book profits. However, such a profit taking move wouldn’t yet break the underlying bullish sentiment, something we spoke about earlier this week, but only in a longer term per-spective. So in case of a correction to e.g. 126-08+/04+ (Dec T-Note contract), short term players may consider entering the market. Should the payrolls surprise sharply on the upside, let’s say 150 000 to 200 000, doubts on the QE may enter in the minds of the investors (even if we think it will ultimately be implemented), the correction may be more severe and the situation for the bonds need to be reassessed.

The reaction on the equities is equally interesting. To keep the outlook positive, an eventual correction on the S&P(weak payrolls) should stop at 1123, or the market would again be in the broad sideways range. A stronger report, but not too strong to break QE-2 hopes would probably open the road for a retest later on of the cycle highs at 1220.

Regarding the Bund, sentiment has been less bullish than for Treasury lately and the 132.20 (Bund) level played its role of resistance quite well. Only a strong advance of Treasuries on the payrolls may push the Bund above that level in a “sustained” way, opening the road for a retest of the contract highs at 133.29, which would be very dif-ficult to break and would offer good opportunities for profit taking. A drop below the MTMA at 131.49 (today) would be a disappointment for the bulls and a first signal that sentiment might turn sour, but only a sustained drop below 130.63 would have more lasting damage."

https://multimediafiles.kbcgroup.eu...unrise_market_commentary_0900dfde8028b215.pdf

 

And Bullard throws a spanner in the works