Massive Bond Sell off on sharply higher NFP Print / Under the hood details point to a softer picture / Levels to watch on US2s

On the NFP Print, the headline print show total Non-Farm Employment rise by 353,000 for the month of January 2024. The January print follows upward revisions to both November and December numbers to the tune of +9000 and +117000. The payroll employment increased by an average of 255K for 2023. The U/R was steady at 3.70% over the last 3 months. The AHE rose 0.55% mom and 4.48% yoy , reversing the deceleration seen since Aug 2023.

Under the hood, the change in Labor Force is to the tune of -175000 driven by a change of -144000 in Unemployment level and -31000 in Employment Level. The Labor Force has shrunk by 621000 over the previous 4 months. The average weekly hours have also reduced to 34.10 weekly hours. The average number of hours worked, hit its lowest level since 2010, barring the dip during Covid.

The below graph is a good way to visualize the NFP data.

This month’s data also had a lot of noise on account of benchmark revisions. It involves comparing the monthly employment data reported by the Bureau of Labor Statistics (BLS) in the United States against more comprehensive and accurate employment data sources. Compared with the sample-based, seasonally adjusted published estimate for March 2023, total nonfarm employment had a revision of −266,000. 

The markets were positioned for a softer USD and a rise in bond prices (Soft ADP numbers / Continuing Claims / Concerns around CRE). The strength of the NFP saw a major reversal and position squaring. In the monetary policy meeting, Chair Powell earlier stated that Fed would like to gain greater confidence around a sustainable drop in inflation and a strong economy gives them the time to hold rates at restrictive levels. The market has been pricing cuts more sharply than Fed's guided path. 

Market implied Fed Fund Futures are now pricing in a cumulative 118 bps of rate cuts into 2024. On Feb 2, Markets were pricing in 144 bps of rate cuts. The Fed's guided path is for 75 bps of rate cuts and there still continues to be a divergence. 

Yields	High	Low	Close	DoD ▲	Weekly Range
US 2Y	4.41	4.20	4.37	16.10	21
US10Y	4.05	3.87	4.02	14.20	18
US2s10s	-0.32	-0.35	-0.35	-1.90	3
US30Y	4.25	4.10	4.22	10.30	15
JGB 10Y	0.68	0.65	0.65	-3.50	3
DE10Y	2.25	2.15	2.23	7.60	9

Today morning, we had Chair Powell comment in his television appearance state that the Fed wouldn’t need to wait until inflation fell all the way to its 2% goal to begin cutting rates. He also said he expected 12-month inflation rates to continue declining in coming months since they’ll be lapping much more elevated levels from a year ago.

The week ahead will see the release of Services PMI (ISM and S&P) on Monday, Jobless Claims on Thursday and Fed’s Monetary Policy Report on Friday. The week ahead also has a list of Fed Speakers - Raphael Bostic on Monday, Loretta Mester on Tuesday, Adriana Kugler / Tom Barkin and Michelle Bowman on Wednesday and Tom Barkin on Thursday.

Technically, I am leaning towards a pay trade. 4.45% offers resistance on the US2s Yield level. I would prefer to wait for a pull back towards the 4.33% level for initiating a pay trade for a move higher.