Bond sell-off puts payrolls in focus

Guessing market reaction to the monthly US non-farm payroll (NFP) report may be even more difficult than usual this Friday.

Economists' average forecasts are for a net 224,000 jobs to have been created in April, and for the unemployment rate to fall from 5.5 per cent to 5.4 per cent.

The Federal Reserve said in the past that such a relatively low jobless level would likely result in it starting to raise interest rates. The central bank has not done so partly because the tighter labour market is yet to deliver a meaningful and sustained uptick in wage inflation.

So investors will keenly watch the average earnings component of the report, which is expected to show a dip in growth to 0.2 per cent.

The problem for traders is that whether the jobs data are robust or meek, the bond, forex and equity markets may remain in thrall to the broader debt shellacking led by the dumping of long Bund positions.

Still, the Bund sell-off is already looking a bit overstretched. Bund futures by mid-session on Thursday were down for the sixth session in a row, their 14-day relative strength index dropping below 15, well into supposedly "oversold" territory.

If a weak NFP report was to coincide with a snap back in Bunds then Treasury yields may reverse sharply. Though counter-intuitively, the dollar could rise versus the euro as the common currency's latest bounce fades with Bund yields.

It is likely equities would appreciate a recovery in bond prices, too.

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