The key to today’s trading action will be whether investor appetite for riskier assets prevails, the first full trading day following Friday’s stronger-than-expected U.S. labor data. The December Treasury Bonds have had a tendency to break and equity markets rise when risk appetite is on the rise.
In case you were away last week, I wanted to give you a quick update on my personal thoughts from last Friday’s U.S. Non-Farm Payrolls Report.
The employment numbers mostly across-the-board came in better than expected, but I was particularly encouraged by two points. Initially, I was encouraged by the revisions for June and July. If you recall during those two time periods, there was a significant amount of concern that the U.S. economy could be headed for a double-dip recession. Friday’s positive revisions of those numbers should temper those fears for the time being.
At the same time, the revisions give credence to the Fed’s assessment of the economy. The Federal Reserve has been under pressure lately to use some of its monetary policy weapons to combat the threat of a double-dip recession. The Fed on the other hand has stated it will only act if there are “unexpected developments” which cause a significant worsening in the economic outlook.
The internals of last week’s jobs data also stood out for me as I assessed the August jobs data report. The fact that there was an increase in the average wage as well as the average work week was somewhat impressive. This suggests that although companies are not hiring on a broad based scale, they are getting very solid production from their current employees. And more important, they are compensating their current employees for that increase in production.
Although the better-than-expected U.S. jobs data report helped fuel the rally in stocks and the break in the Treasury markets, investors were handed a fresh reminder that there still are problems with the U.S. economy when the Institute for Supply Management said its U.S. services-sector index hit 51.5% in August, down from 54.3% in July. This report missed economist expectations of 53.5%.
Stocks gave back a little of their gains and December Treasury Bonds pared their losses on the ISM Services news.
Technically, despite the hard sell-off, the T-Bonds still show no sign of changing trend. What the current sell-off amounts to as of Friday is a clean 50% retracement of the 124’22 to 135’19 short-term range. The first target of 130’17 was exceeded when down side momentum drove the market into 130’12 before short-covering following the ISM Services report helped the market regain the 50% level. Should the low at 130’12 fail, then look for a further decline to 129’11.
Based on the sell-off from 135’19 to 130’12 and the trading action late Friday and during Monday’s electronic trading session, December Treasury Bonds may make an attempt to retrace back to 133’02 to 133’22. Bearish traders may try to form a secondary lower top in this range. If this pattern occurs, then look for the start of an even steeper sell-off over the near-term.
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