Debt Markets Respond To NFP Report

Includes: FXB, FXE, UDN, UUP
by: Ralph Shell

Often the Non-Farm Payroll Report is the most important report of the week, and a game changer in many markets. Today the report grabbed the headlines - 195,000 new jobs which was 30,000 more than expected, and the number from last month was adjusted upwards by 20,000. Details of the report, however, are less glowing than the headlines.

According to the Dept. Of Labor Household Survey, there was an increase of 360,000 part time jobs in June to a record 28,059,000. Full time jobs for the month were down 240,000. Again the increase in part time jobs was concentrated in low paying sectors. Leisure and Hospitality accounted for a 75K increase, followed by 37K in retail, and 23K in Health, education temporary jobs.

Some people claim the increase in part time unemployment is caused by a Obamacare mandate that all companies that employ over 50 people must provide healthcare for their employees. Since a full time employee is classified by the government as anyone working over 30 hours per week, many employers have reduced the hours of employees, making them part timers. Further, business owners have probably postponed decisions to expand their business, fearful of Obamacare costs. This provision was originally scheduled to be implemented in 2014, but members of both parties have called the plan a "train wreck" and have now postponed this provision until 2015, after the next election.

Regardless of the report's details, some of the investment houses have expressed their opinion the Bernanke taper will commence in September. This has sent shock waves through the debt markets. US 10-year bonds are up to a 2.71% yield from 2.44% on Wednesday. Rates are creeping up elsewhere. Despite claims that the eurozone and UK bonds will be kept low, the yield is up 47 basis points in the UK, Italy 29, France 24 and even Germany is up 21bp.

The yield on US Treasuries is almost a full percentage point higher than the yield of the 10-year in Germany, 1.72%. The premium for the German debt is prompted by the perception it is the most secure in the eurozone, and there are European investors who are fearful of the currency risk when moving money outside the eurozone.

But how secure, really, is the German economy if her neighbors' economies are crumbling? Just as the 99bp discount Germany under the US 10-year looks too wide, also is the 76bp discount for Germany under the yield of the UK gilts justified? With the French economy in total disarray under the hapless Hollande, how long are the 10-year bonds going to yield 2.29%, a big discount to the yield of both the US and the UK paper?

Several weeks ago I spent some time in London and the beautiful country side in Sussex. London seemed to be bustling with activity, and I noticed numerous building cranes indicative of construction activity. There were abundant signs of wealth in the country. Today in Market Watch, it claimed that London was the home of more multimillionaires ($30 million or more) than any other place in the world. A total of 4,296 of the super affluent live there.

It has been a good week for the USD, (UUP,UDN) as it gained against all of its significant others. Both the euro and the pound are closing the week poorly. It looks like the euro is destined to check out the 1.25 handle.

The pound, at 1.49 versus the USD, (GBPUSD) looks like it should be finding support around this level. Take out the 1.49 support and who knows where we are headed? Last week's COT report showed the specs were long the euro and short the pound. The euro did gain against the pound for the week but at the current level, .86, we are inclined to sell the euro and buy the pound.

As always, be mindful of your money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.