returning from the holiday and getting ready for NFP tomorrow (Thursday)

If the market does anything today, it will focus on getting positions right ahead of tomorrow.  Has been fairly quiet since Tuesday’s risk-off move in US late morning, with much of that move given back in the last 12 hours.  As of 8 AM ET, Treasury yields are 2.5 to 3 bps higher, led by the belly while equity futures are higher by just under 1% ahead of the cash open.

Better than expected service PMI numbers while the US was out yesterday for China, Japan, Germany, the Eurozone, and the UK helped support risk on trade since yesterday.  As one would expect, Treasury flows were somewhat muted given the holiday overnight.  Treasuries reopened last night marginally lower to their 1 PM (early close) marks from Tuesday, with Japanese real money a better seller of 10s and 30s.  Interesting that central banks were the best buyers during the Asian session, focusing on 3s and 5s;  Chinese yields were lower as the RRR cut from last week took effect, helping to motivate the central bank buying.  JGBs traded firm on the back of a strong 30y auction there.  After Tokyo lunch, a bit more Asian bank selling in the attractive 5y and 7y sectors of the curve.  Asian stocks were under minor pressure after a better performance yesterday, with most indices down between .5% and 1% on the session.  Worth noting that Bloomberg article yesterday highlighted the interest of Japanese accounts to move out of Treasuries and into spread product in the hunt for yield.  Remember that one near the end of this month; you’ll hear a lot more about that if my chart work is correct!
Europe has largely been about supply and a little risk on, leaving European and US fixed income slightly lower.  A large slug of supply across the curve from Spain, as well as some belly supply in France left European rate dragging Treasuries lower, with dealers as early sellers in schatz and bunds, RV selling TYU contracts both outright and against bunds, macro account selling bunds to buy gilts (on the Bloomberg story that the ECB may be more aggressive in tightening, potentially at next September’s 2019 meeting).  Spain’s 3y and 23y issues met lukewarm demand while all three sectors (12y tranche as well) saw poor pricing.  France’s long end supply went well, but struggles persisted in the front end.  Carney speech didn’t add much clarity either.  Treasuries saw another small bout of Asian bank selling in 7s mid-morning in Europe.  There has been more aggressive flattening on the German curve with the rate hike talk and a macro account doing EUR 5s30s flatteners in swaps.  European stocks have held a bid throughout the session and are underpinning US equity futures.
After Tuesday’s bullish reversal higher formations across the curve in Treasury futures, it is interesting that we haven’t even happened a look at satisfying the trade signal by taking out Tuesday’s highs.  With the pullback, this becomes interesting; hard to fade something that works 80% of the time, so let’s keep an eye on this.  For choice today in TYU, let’s call the range 120-15+ to 120-01+.  Take out 120-01+ on the downside, and we’ll quickly move to test Tuesday’s low at 119-30, which will then officially invalidate Tuesday’s bullish reversal signals.  Below there, watch 119-27 and then 119-23.  Get back above 120-06+ and we’ll feel much better about the bullish reversal working, with resistance above 120-15/15+ at 120-22, 120-26, 120-31 and 121-02+.
ADP in 10 minutes, then claims at 8:30 AM ET, ISM non-manufacturing report at 10 AM, and we’ll wrap up with minutes from the June FOMC meeting at 2 PM ET.  Then it will be all about tomorrow’s NFP report….
Have a great day,