The correlation between the rate of unemployment in the United States and the value of Eurozone public sector debt is possibly sketchy at best. However, today investors were nervously awaiting data from the Labor Department in the hopes that falling unemployment would help investors bear the strain of the problematic debt burdens faced by smaller European nations, which in turn were delivered by the impact of slower growth courtesy of the U.S. financial crisis. In any event, the headline unemployment rate inexplicably fell to 9.7%, a radical departure from a double-digit rate that many have predicted will remain during 2010.
Due to annual revisions the report provides less visibility than hoped. But what we get to take away is that while January job losses totaled 20,000 there is room for hope. Job creation occurred within both service and manufacturing sectors. The rate of underemployment, which which many perceive to be the true rate of unemployment, fell sharply from 17.3% to 16.5%. Finally, the average hourly workweek nudged ahead by one-tenth to 33.3 hours, indicating lengthening work times.
During the dissection of the report, the S&P 500 index futures slumped to their lowest level since November 6, 2009 at 1,050.625. And while the report leaves analysts floundering over a precisely how good or bad the report really is, I have to conclude that the arrival of the data itself is one step further towards a calmer path for the market today. After all the churning in the aftermath of the data, investors have to weigh, based upon the report, whether they have reason to slam dunk stocks once again today. It’s been a bad week for stocks, and for the European markets especially, it’s been a nasty, nasty one.
Eurodollar futures – March notes reached a crescendo before today’s report, trading up to 118-26 as the Eurozone deficit story creates added anxiety. Yields fell to around 3.56% and the employment picture created a wave of relief selling. Notes came back to unchanged in light of the report and are a little higher at 118-13. Most global short end futures continue to exhibit similar patterns, with the March and June contracts down a couple of ticks while further dated contracts continue to rise. This would perhaps indicate marginally firmer cash demand in the money markets on rising Eurozone funding fears. If sovereigns are under pressure, watch out for pressure at the bank level.
European short futures – Gains for longer maturities along the euribor strip clearly illustrate the fact that the yield curve is flattening sharply in tune with the argument that disorderly deficits demand economic slowdown. The March future is down two ticks at 99.30 while the March 2011 contract has rallied 10 basis points to 98.42. As the spread between the two contracts narrows by 12 basis points the yield curve becomes flatter. ECB President Trichet tried to divert market focus away from member deficits at its periphery pointing out that U.S. and Japanese budget deficits were significantly larger than those of the average Eurozone member. Perhaps Mr. Trichet’s definition of average would be different if he sat in the hospital emergency room with one bare foot in a bucket of scalding water with the other in icy water. On average, he’d feel no pain.
British interest rate futures – The British yield curve faces ongoing flattening similar to that in Europe. The March futures is lower by two basis points and again is higher across later maturities as stock markets remain lower and fears for economic slowdown remain intact. March gilts rose 15 ticks to 116.01 where the yield is 3.88%.
Australian rate futures –Aussie government bonds rose sending yields down six basis points to 5.38% after a quarterly report from the RBA indicated that it views deficit reduction plans at advanced nations as a threat to growth. It also upgraded its domestic growth outlook citing gains in the fortunes of export destinations of China and India. Aussie 90-day bills rallied five basis points across the yield curve.
Canada’s 90-day BAs – Canadian yields actually rose by a couple of basis points to 3.37%at the 10-year after a domestic report showed the creation of 43,000 jobs during January. The strengthening labor market created three times as many jobs as predicted and keeps the domestic economy on a convincing path of recovery. Hence, 90-day bill prices are finding little reason to rally today with prices a tick either side of unchanged along the curve.
Japan – Investors bough JGBs overnight as North American equity market weakness translated into deeper losses for Asian markets where the Nikkei fell by 2.9%. Bond buyers sent the March bond contract higher by 23 ticks to 139.03 where the yield eased to 1.35% into the weekend.