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How Did The Markets React?

Currency traders showed clear confusion following the day’s economic figures, with a sharp anti-dollar move leading to later strength. It was a classic case of an “incorrect” reaction to headline figures, as the Change in Non Farm Payrolls came in considerably below consensus forecasts. Those who tried to immediately sell the Dollar following the disappointed were quickly burned, as a closer examination of the labor report showed that a previous revision effectively left figures squarely in line with expectations. Despite a slightly higher unemployment rate, currency traders quickly corrected their previous mistake and sent the Greenback to close near daily highs. Such occurrences arguably provide excellent trading opportunities, with tight money management allowing for solid potential for profit. 

Bonds – US 10-Year Note Futures

Bonds were no different than their currency counterparts, with the 10-year Treasury Note future posting a dramatic reaction to the morning’s NFP report. An initial fixed income rally was clearly short-lived, with the chart below emphasizing the violent correction that occurred only 10 minutes into earlier gains. Bond yields were not quite as fortunate as the dollar, however, as prices actually finished higher following a poor U Michigan Consumer Confidence figure. The clear disconnect between US Dollar price action and bond yields is perhaps disconcerting; weakness in rates typically weakens the American currency.

FX – EUR/USD

Going into the event heavy hours of the New York session, the EURUSD (and all dollar pairs for that matter) were tightly wound with speculation. What’s worse, many traders set up for day’s domineering NFP release by placing close limit entries above the 1.3050 resistance level monitored as the top of a three-week old range. With the dominos lined up, price action began to play out when the payrolls data scrolled across the wires. The short-term market players in the crowd took the indicator for face value and started bidding EURUSD on a smaller than expected 111,000 print.  Struggling to take out the channel top, the pair only made it to 1.3065 before the realists overwhelmed the minority.

For economic relevance, the 39,000 person miss was modest for the usually volatile NFP report. This is further evidence that the Fed’s call for stabilization in job growth is already on track. What’s more, the sizable revision to the previous month’s print was signaling the optimistic core to number. Ultimately though, the sharp turn and subsequent break below 1.30 was blamed on market savvy traders gunning for obvious stops that would help win another 50 points for well placed shorts. However, the factory orders report for December likely played a hand in this move. The biggest jump in bookings at manufacturing in nine months is a boon for a sector that marked its worst performance since April of 2003 in January. Going forward, the range will help to sculpt trades for EURUSD. If volatility holds through to Wednesday’s ECB rate decision, investors will know their parameters.

Equities – S&P 500 Index

US equities took to the data quickly this morning, though the numbers were both sweet and bitter for investors. Always taking the bad news first, the weaker than expected payroll report could cut into first quarter revenues. What’s more, the step back in wage growth through December helped set in the realization that raising prices may not work in the months ahead. The market may be progressively more sensitive to macro consumer reads going forward as fourth quarter earnings reveal slipping profit growth in small caps and fringe blue chips, often a precursor to broad u-turn. Before that happens though, an optimistic market is focusing on the Fed and interest rates. While the employment and income numbers question consumer spending in the future, they also help put the policy board at the central bank in check. Taking some of the gas out of the consumer’s tank could keep core inflation within tolerable limits and leave the Fed with little reason to pursue another rate hike.