The health of the US jobs market and the ebb and flow of sovereign risk concerns will be the key drivers for the bond market on Friday in what could be a volatile trading session. Any job growth, especially if stronger than the Reuters consensus forecast of 8,000, could prompt some selling. And selling would get a boost if stocks, which plunged on Thursday, score gains of any substance on the jobs report.
-- Ebb and flow of sovereign risk concerns a factor
-- Sovereign debt issues are a wild card, analysts said.
"Every day brings another news cycle on the sovereign debt front," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida. "Just a couple of days ago the European Union accepted the Greek fiscal plan and spreads started to narrow, but 48 hours later you had a completely different news cycle and it was negative." Concern over Greece's fiscal woes spread to highly indebted euro zone countries Spain and Portugal on Thursday.
Bond trading on Friday could be volatile, analysts said. Sullivan said Thursday's market volatility "scared the shorts out of the Treasury market," but probably did not leave the market long. "Thursday's bond market advance was the Street covering previously established short positions," he said. "We are now neutral going into tomorrow's employment report for January."
That means if the government's report for US non-farm payrolls in January shows a loss up to 50,000 jobs or expansion of as much as 15,000 jobs, the Treasury market's reaction probably will be muted, said Michael Moran, chief economist at Daiwa Securities America in New York.
"Job figures in that range would be similar to what we've seen in the past few months and would do little to change the market's view of US economic activity or the US labour market," he said. The key contributor to the recent volatility has been shifting perceptions of sovereign debt risk. That phenomenon could persist as investors' feelings about risk are buffeted by fresh news, analysts said.
"Right now the market's not focused on payrolls," said Ward McCarthy, chief financial economist at Jefferies & Co in New York. "It is focused on the death and destruction in equity markets in Europe which carried over to the US market." US stocks skidded on Thursday with the S&P 500 stock index falling more than 3 percent.
The safe-haven flows that ensued drove Treasuries prices up and yields down, creating "some pretty sloppy positions ahead of tomorrow's payrolls numbers," McCarthy said. "We don't know how the market will be trading tomorrow at 8:30 am. It could be payrolls (driving the action) or it could be another shock to the European financial markets," he said.
Although the US payrolls report is typically the market focus when it is released on the first Friday of a new month, McCarthy said, this week's report has the potential to be "relatively chaotic." He noted that against the sovereign risk backdrop there will be benchmark revisions, with the Bureau of Labour Statistics changing the aggregate hours data and the average hourly earnings data."
In the end, the sovereign risk story could throw the US payrolls report into even sharper relief, Moran said. "The US economy is still going to have a big influence on what happens to interest rates around the world," he said. "The sovereign debt issues are important, but payrolls can't be ignored."
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