The First Hurdle

The employment (and unemployment) number is usually the monthly domestic number which is the biggest market mover. June's employment/unemployment number was a 2 standard deviation surprise to the upside with the unemployment number hitting a 33 year low at 4.2%. At the time, pretty much the whole desk was long. It absolutely killed us.

This time around, the expectation was for a low employment number. Blythe was calling for a correction of the 2 std deviation move and expected the employment number to be flat and the unemployment figure to bounce back to 4.3%. I was happy to go along with a low number (Blythe and CBA have good cause to be trusted on these forecasts), the question, however, was how far could the market move on this number?

With CPI on 25 July being the main game with regard to determining if the RBA was going to hike, I could not see the curve out to 3 years moving more than 5-6 points either way, regardless of the result. However, it was greatly due to the strong domestic data in June that the market had sold off as much as it had and if that result were now negated (or at least countered) by July's data, shouldn't we be roughly where we were before June? The spanner in the works was that foreign (in particular, US) bond markets had sold off considerably in that period, with US 10 Yr yields going from 4.888% at the end of May to 5.086% on Wednesday's close.

I was modestly short going into Thursday morning, looking for a little sell-off overnight to go long again and at least square up my futures in the long end. I got that sell-off late in the New York session with 3's going from 62.5 on Wed's close to the mid 50s and 10s going from 84 to 77 or so. I bought 100 3s at 56.5 and ended up crossing the spread (unusual for me) at 11:15-20 to buy 280 10s at 77. I could have gotten set half to a full point better, as it turns out, but I was frightened of not getting set at all or at much worse levels as liquidity dried up prior to the number.

It turned out fine, as it transpires, because employment printed at 2,500 (against expectations of 15,000), with full-time falling by 34,300 and unemployment retracing to 4.3%. As expected, the market rallied 2-3 points or so in the 3s and 10s, the curve steepened a little, and then the market traded back and forth, almost unsure what exactly that should be worth. Stronger buying came later in the day and the short-end rallied very nicely, with Sep bills rallying 3-4 and Dec/Mar bills even more.

This was all great for me but left me feeling as if I should have been a bit longer going in. That's a little revisionist, I guess, because I was still a little gun shy after all the strong data in May/June. A lot like betting on a string of losing horses, cutting back a bit on my bets and then saying I should have bet the farm on the horse that does finally come in.

I resisted the urge to replace my short position in 10s because I still see the major risks in the US to the upside (shaky credit markets and the possibility of correction in the equity markets). I still think that when the range finally breaks, it'll be more likely to the upside.

Vincent seems considerably more active and vocal now. He came over to talk about how he believed that the upcoming CPI figure (prob headline) would be negative. I wanted especially John to see how he thought things through by asking Vincent why he believed so. He didn't disappoint, bringing up figures, anecdotes and citations to back up his opinion. It is great and uplifting to see that he is still in the game.

Thursday night saw 10s sell-off down again to the mid-70s on the back of a massive rally in equity markets (damn, forgot to switch my super back into equities). I really had no strong intraday conviction about the direction the markets were going so I stayed where I was, and stayed with the same range play bias.

Went to lunch at Malaya with Boyd, Channy and Johnny. Great food but those guys are hard-core soccer nuts and I'm not sure I fit in under that umbrella. Nonetheless, I enjoyed it.

I must admit, at the moment, to having trouble with getting all routine tasks that I have to take up with Darius' absence done as well as planning for and executing trades in my book and also getting work done on my project of pricing the fixed rate home loan swaptions.

Luckily for me, my book is making money at the moment so I don't feel too bad about it all. Must lift my game a bit though.

Position: Moderately long out to 3 years (including futures), moderately short thereafter with no futures position.

Best case: Bull steepening.

Worst case: Bear flattening. The curve has steepened a fair bit already (things are going well all over right now). This situation could develop if equity markets overseas rampage onwards.

Looking to square up my long and curve position a bit next week. Good time for it, seeing as we're top of range again. Might even put on a modest flattener.