Jobs. Jobs. Jobs: Treasuries got an added bid following the consumer credit report. The bonds had an OK, but mixed day, with the worse-than-expected jobs report not giving the trade the traction that perhaps it should have. With the 10.2% unemployment rate, and the slightly higher -190K on payrolls perhaps bad, but not bad enough as the market had been long forewarned that 10% was in the cards. The long end was swung pretty well with the 30-yr getting back to the worst levels since mid-August and the 2-yr near its best since May. Trade is going to be all about supply with next week's $40B 3-yrs, $25B 10-yrs and $16B 30-yrs to be auctioned Monday, Tuesday and Thursday (financial markets are closed on Wednesday) all offerings are record levels. As far as how the weirdly chopped up week will shake out is hard to gauge, but either way, Thursday's offering might be ugly with a capital "f". The latter part of the day saw some serious unwinding of the curve trade with the 2-10-yr yield spread 265.1 after a brief trip to near 270. The dollar was able to hold on to minor gains, but trade devolved into really tight ranges late in the day. The week ahead has a back loaded calendar, but there is no serious junk in the trunk either, and the auctions will consume the market's scattered attention. Fed-speak will be heating up a bit, and they may have some explaining to do (although most of them have been on the 10% bandwagon for some time) with gov Tarullo late Monday (19:00)and pretty much a couple a day for the rest of the week.

Credit: "As expected, consumer credit fell for the eighth consecutive month. Credit declined $14.8 billion in September, far worse than the consensus forecast of -$10.0 billion. The consumer credit decline for August was revised up to -$9.9 billion from -$12.0 billion. The reason for the decline in consumer credit has not changed. Consumers continue to believe they too highly leveraged and are working to repay their debts. At the same time, banks are worried about possible loan defaults, and in return, they have tightened lending conditions and pulled available credit from even the most credit worthy borrowers. The data provided by the Fed does not provide a way with determining if the drop in consumer credit was driven more by consumers not wanting additional funds or banks not willing to lend."

Range Rut:The dollar has been able to hold small gains in an extreme tight range, with the index running near 75.80 for the latter part of the day. The euro is lower ticking around near 1.4840 on the buck while slipping on the yen as it gets the bulk of the safe-haven buyers. The yen is holding near 89.90 while giving up 133.50 per euro from near 135. The week ahead could get dicey for the dollar, with little to cling to as the market skates through Treasury auctions, and, unless the massive amount of supply really drags on the bonds, knocking up yields significantly, the buck could get dinged back to the low 75 level. Gold was able to stay on top but also sank into a late day range, now 1094.20 (+3.90) while crude was drilled lower as jobs dry-up so do demand expectations.

Pick a Side: Via WSJ-The bad news is that the jobs situation seems to have stalled out after improving dramatically through the summer. Private payroll declines actually widened slightly in September and in October. Thus, while we still strongly believe based on anecdotes, surveys, and other statistics that the labor situation is improving and that job losses will come to an end within a few months, the payroll numbers themselves do not indicate much positive momentum. In contrast to the payroll survey results, the household survey data were unambiguously negative. The unemployment rate surged to 10.2%, as the household gauge of employment plunged by almost 600,000 on top of September's 785,000 drop. --Stephen Stanley, RBS ...Cyclical recovery is evident as job gains rise in temporary help and education/health and smaller job losses in retail and financial services. Turn in the labor market is very evident. Do expect job gains in 2010. --John Silvia, Wells Fargo...Productivity gains and the hoarding of skilled labor earlier are some of the reasons for the jobless recovery. For fear of losing jobs, the current employees are working harder. During the recession, employers kept its most skilled workforce for better economic times. As production increases in some parts of the economy, the hoarded labor is utilized without adding to payrolls... Two of the hardest hit sectors of the economy, manufacturing and construction, should show some signs of stabilization in the future. --Sung Won Sohn, Smith School of Business and Economics

Harder Faster Stronger: The market continues to push out expectations for the Fed to start pulling the trigger on rates, with traders talking 2012, while some options players say that once the cycle does start, the increments will be large. "They may not have the luxury of your little quarter, quarter, quarter" notes on longtime dealer, who sees them "jumping to 1.25% to 1.50% by April, [What?] while acknowledging there "aren't many guys in my camp."

Just Saying: Thank you Ritholtz...

Mixed Business: The market has been back and forth, but mostly back on the long end and forth on the short, holding the yield curve near the steepest levels on record. The swings in the longer maturities have been wide, tapering off down the curve. The market is fully invested in the Fed being on hold well into 2010 as the miserable jobs data continue to show deterioration, albeit, less deteriorating (BMO's Andy Busch put it well "These weak job numbers won't preclude central bank and finance ministers discussions about how an exit strategy will be enacted nor when it will begin. This weekend's G20 meetings will follow up on the previous meetings verbal jousting on how this will be accomplished...Wrapping this up, things are slowly getting less worse and not much else has changed.") The market saw some of the best size in a long time on this report, sadly it took a 10.2% unemployment rate to drag players back into the game (or force them out, as the case may be). The mixed nature of the trade will continue to dominate while the steepened curve will remain on track for record levels. The 2-10-yr yield spread saw a push to just shy of 270, aiming for the 270.5 point once the week-ends unwinds wash through. The dollar was given an initial bump to better levels on the brief safety plays and short coverage, but slipped back to little changed as rate reality set in and trade falls into the range rut. The euro was dunked from near 1.4915 following the wholesale inventories report while falling further on the yen as risk was unwound. The yen has picked up but has stalled near 89.80.

 

Thank You, Marc: BBH's Chandler - Sometimes the rise in productivity can be achieved by boosting the amount of capital investment per employee. This would be a favorable and sustainable rise in productivity. In contrast the current rise in productivity is happening as business cut costs, especially, labor costs. Higher productivity translates into lower unit labor costs. They fell 5.2% at an annualized rate in Q3. Over the past four quarters, unit labor costs have declined by 3.6%, the largest four-quarter drop since the time series began in 1948.There are several implications of this for the economy, [and] policy...strong gains in productivity and falling unit labor costs is part of the reason the Fed feels confident that price pressures remain subdued and that rates can remain low for "an extended period.". Second, these gains in productivity coming from cost cutting are not sustainable in the long-term. It is in some ways like the inventory cycle.

Aiming Back: The dollar has been clawing its way back from near 2-week lows with the jobs data, ugly as it was, out of the way, causing a brief flurry of short-coverage and safety buying. That trade quickly died out and the euro recovered to just shy of the week's highs, but was unable to hold while sliding back against the yen to 133.22 from 135. The yen has reaped some safe haven benefits, near its best levels since mid-October and sporting an 89 handle once again. Gold is working near its record levels as the combination ugly jobs picture and really low rates spook trade with spot running to tag 1101.42 now 1094.57 (+4.27). Crude has slipped hard as the as the worsening labor outlook sucks out demand expectations.

Fed-Up: NY Fed bought $2.714B of agency debt in the 2013 to 2016 maturity range of the $6.389B dealers tried to unload

Slowed: Trade has stalled out again after runs of good sized flows but things are leaning to the upside with the belly still leading. There has been a "sell the rumor, buy the fact" sort of trade taking hold, while options have pushed implied volatilities up on the long end while cheapening the shorter end and holding the 10-yr flat. The VIX volatility index has in the meantime tumbled to its lowest levels in nearly 2-wks as per usual in the wake of the payrolls report.

Back On: The market is seeing a renewed bid with the 3-7-yrs leading. The steepening curve has reversed, but remains near levels last seen in July. The 2-10-yr yield spread is working toward the 270 area where it will likely quickly pop to 270.5 before staging a rapid retreat, but will continue to flirt with record levels. Volume had been huge (relatively) but has tapered off with flurries running through but seeming to stall out abruptly, leaving players to need to extend their reach into the holes

Denied at 3.55: Trade was getting slammed in decent sized action with the long end leading lower while the shorter stuff holds in as safety players shift down the curve, but are still hunting for quality. The drop in wholesale inventories was actually better than expected, sort of, still in negative territory, but on an upswing. The 10-yr has been swung about 9.5 basis points on the session while the 30-yr went near 10.5bps.The 10-yr fell off to tag the 3.55% level where it was flipped and went back bid. The market is facing a huge run of record supply next week, even as global corporate offerings drop off steeply. The ongoing run on gold has been spooking traders, but the growing depth of supply on the longer end is sending buyers down the calendar.

Next: Wholesale inventories fell 0.9% in September, slightly above the consensus estimate of -1.0%. Inventories fell 1.3% in August. The decline in inventories is falling, which is why the change in inventories showed up as a positive contribution to GDP in Q3. We expect the decline in inventories to continue to moderate as expected consumer demand starts picking up through the economic recovery. Most economists continue to look at the inventory restocking cycle as the key component to sustainable GDP growth in 2010. Unfortunately inventory growth is not labor intensive and rarely involves a drop in the unemployment rate.

Trading Back: The market has backed off from the best levels as the mid-curve continues to lead the way with the size running through remaining comparatively high and the upside limited ahead of varied supply. The week ahead has a run of record levels of 3-10-and 30-yr offerings, and the reality of that flood will weigh across the curve. The curve was swung wide but the flattening of unwinds should rule the day. The 2-10-yr yield spread is running 264.2.

Ouch: The market has bounced higher as the 10.2% on the houshold survey was a huge slap in the face and the worst since April 1983 (echo, echo, echo). The middling 190K loss on the payrolls side was just that, a bit more representative of the worse end of guesstimates. The safe haven bids were lit-up by the horrific rate part of the report, while the just-a-bit-higher payrolls were less an issue. The market was well prepared for an "almost" 10% hit on the unemployment rate, but the reality of 10.2% is a fairly stark rise and is sending bonds higher. The 10-yr has been bounced back through to tag the 3.456% level while the mid curve went crazy, gaining renewed interest as the "safer" safety space. The dollar caught a bid on the disastrous report that, even though job losses are well below the average since 2007 of nearly -300K, was still a large scale disappointment. Trade has been running at much higher volume and the shorts that got an itchy trigger finger over the past couple sessions are being squeezed out in a hard way. The market will be blasting out stops near 3.4545% on the 10-yr while the newly-respected 5-yr will be hitting them nearer to 2.255%. The mid-curve continues to swing wider but the curve as represented by the 2-10-yr has gone no where, remaining near 262, still steep but not especially steeper than ahead of the report.

Waiting for Data: Trade is mixed but leaning better ahead of data. The 10-yr was climbing some ahead of the jobs report, but has lost some ground and the curve has been sent back flatter, but still near the steepest levels ever

Table of overnight activity in the financial markets.

Ready. Set: The market was mixed with the longer maturities getting hit while the shorter end holds in as the Fed remains at "excessively low" rates for an "extended period." The day was quiet as most of the major event risk has come and gone and all that's left is tomorrow's jobs report. That's all. Just the jobs report. The market is looking for a loss of less than 200K jobs, but that "good" news may be accompanied by an unemployment rate in the neighborhood of 10%. Not good, but the market may be ready to ride that out having been well prepared (by the officials no less) for the possibility. The VIX seems to be fairly sanguine, comparatively, about the report, hanging at the week's lows, which goes back to what many have said about an early year end, with no one wanting to play if the year has been OK ("why stick your neck, or your bonus out?"). Some central banks, if they have not begun raising rates, have started talking about assorted "exit strategies" for sundry "extraordinary measures" (talking being the operative word here) or trimming back some of those measures. How much the market buys into this talk and its timeframe is hard to say, with the market betting the funds rate will be on hold until at least mid-2010, but the talk has continued with perhaps a more serious tone, and there is no question the market will have plenty of warning as policy makers try to ease things through a sticky exit. Curves have been trading generally steeper with the mid-curve spreads leaning a touch flatter, which should continue to be the flavor of the day through to the data tomorrow. The 2-10-yr yield spread is holding near the steepest since late-July at 265.3. The dollar was under pressure throughout the session with the index holding near 75.75. The euro was working the 1.4870 point while pulling back toward 135 yen. The yen was caught near 90.65. The day ahead has the jobs report, which in light of the upside surprise in productivity may get a harder than normal look at the work week input (8:30), wholesale inventories (10) and consumer credit (15). Fed-speak kicks off with Chicago's Evans (9:45) and gov Duke (11:30).

Bid: Bonds are slightly bid ahead of jobless claims. The curve remains steeper and poised for further widening