Daily Clueless Musings 6/02

Eurodollar futures retraced back from yesterday's rally before tomorrow's NFP. The expectation is low. Any number that is close to the expected 170K will likely make futures break. However the economic data today showed no sign of improvement. Initial claims was 422k. The level of claims stubbornly remains above 400k level. Unit Labor Costs were revised down three tenths to +0.7%, which eases the pressure on core CPI inflation but implying continued softness in labor market. Both will put pressure on nominal GDP growth. Factory orders fell 1.2% in April and shipments were down 0.2% during the month. Durables are down 3.6% in April and related shipments down 1.3%. However the data could be disrupted by the Japan earthquake, as transportation products led the declines in both durable goods orders and shipments. Moody's said US government's rating may be cut if no progress on debt limit. No one in the world believes debt ceiling will not be lifted. So stock market reacted by bidding up the stock prices. Eurodollar futures broke on the news. It seems that market believe the more pressure rating agencies put on the congress to raise the ceiling, the more likely for the ceiling to be raised without too much deficit reduction. Slower expansion of US government’s balance sheet is probably the last thing the market wants in the middle of this slow recovery. As US private sector needs to de-lever, there needs to be an expanding balance sheet to absorb the savings. As emerging markets like the BRICs are putting brakes on their economy, Japanese are facing the uncertainty after the natural disaster and Europe is swamped in the debt crisis/ austerity measures, US government becomes the most important source to absorbing savings from private sector. Expansionary fiscal policy is very bearish for fixed income and bullish for the recovery. It seems to be the first time in a while we do not see people rush to buy futures on the dip. The expectation is too low for tomorrow's number, the tail risk tilts toward downside. Vols were firm, as futures break. There were some straddle buying. Paper has not put on big bearish trade.