At the bottom of the hour, we will get the employment report for June. In case you haven’t been buried by everyone’s research, the call is for NFP to rise 3.06MM after last month’s stunningly strong 2.51MM jump. Treasuries are flat with 5s and 7s outperforming slightly in a quiet lead up to the big data, while US equity index futures are (what else???) 1% higher before the number and the cash open an hour after the report.

Private payrolls are called +3MM (+3.094MM last month), while hourly earnings are expected to decrease 0.8% (-1% last month) in a reversal of the jump from the middle of the crisis. Yes, we all know the deal behind the return to work story. Watch the labor participation rate (expected 5.3%) with the unemployment rate expected to fall to 12.5% from 13.3% last month from it’s high in April of 14.7%.

Mention all the above because the whispers are much much higher than the consensus for the employment numbers, and the market appears to need a blowout number to sustain such belief and (usually) by definition the positions that accompany belief. However, something does not feel right in Denmark, or at least Chicago. Treasuries trade tired, not short, just tired. Stone McCarthy Portfolio Managers Survey, while in a zone that does not give a clear signal (100.2 as of yesterday for weighted duration vs 100.3 the past several weeks), certainly doesn’t support the idea of money managers getting short. Commitment of Traders shows spec shorts paring some of the position in long end on the flattening into the last report, even though we have bear steepened the better part of this week (not much though!); however, specs have flipped net long in TY contracts which is interesting. That should not matter in a duration world, but I think anecdotally you have to pay attention this time.

An old friend was back this week hedging up long Treasury positions. We saw 50K put spreads lifted during Asian hours over the first three sessions of this week, all 1 point wide (~11.25 bps), 137/138 spreads, 137.5/138.5, 137/138.5, always paying roughly 1/4 point (16/64) for the structure, as Japanese real money hedges up long Treasury positions ahead of today. Have not seen that in a long time. Meanwhile, every hedge fund on the Street is seemingly short the ATM strike to be long call/receiver or put/payer strikes. Hence the bid to skews in both directions, more consistent than recently, but with the market stuck in less than a 40 bps range for 10s over the last month, there is plenty of opportunity for each side to get their favored directional wing on. The problem is getting those wings to hold a bid on a move to strike, but that’s a conversation for another time.

Okay, lastly we have the calendar. Today is a half day for cash with SIFMA recommending an early close (2 PM ET) for cash trading; forget the exchange and their silly rules, trading will stop when cash closes so this is a half day. We have had some very crazy moves on half days before and in a coiled market like this there are several indicators looking for a 2 SD move today. Treasuries look to have found their level for the number. Minor pressure early in Asia, but real money buying of US 7s and TY futures after Tokyo lunch followed by central bank lifting of 10s and mortgages stabilized the market. Great MoF 10y auction results and good New Zealand supply bid Asian rates but barely supported US. Supply was digested, even if not well in Europe and bunds lead continent higher this morning, but Treasuries are stubbornly sitting on “unchanged”. It’s all about the number.

So, if all this silliness does finally come together to give us a move, and several momentum/timing models line up for it as well, it could get interesting. Sticking with TYU contract, the levels to watch are 138-10 and 139-25. Think one of those is in the cards today. All these “what are you going to do on the number” surveys are pointing out the increasing disparity in favor of accounts looking to sell. Hasn’t been very helpful since early this year, but maybe there is a truth down there that accounts are too long the belly waiting for YCC/YCT (whatever you want to call it that the Fed doesn’t want to hear). If you take out either of those levels, and I will wager you at least test one, it could get ugly.

Support in TYU comes in at 138-26, 138-19+, the 138-10 key level; a break should take you to 137-27, where I could see first chance to buy. 137-21, 137-13 below there. Resistance is at 139-06+, 139-12+, 139-16, the 139-25 key level. Through there should get you to 140-02, with resistance beyond there at 140-10, 140-18/20. Also get composition for next week’s auctions in 3s (expecting new record size of $46/47BN), reopened 10s and 30s. So if the markets starts tracking to higher yields, RV and dealers will be only too happy to let a fat concession build in the long end.

Good luck and have a great along with a safe holiday weekend,
mjc