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Treasuries Calm Before Non-Farm Payrolls Report

Fundamentals

Treasury futures have been quiet to start the New Year, as traders gear-up for this morning's release of the Non-Farm Payrolls report for December. Market participants were caught off guard last month when the Labor department announced that "only" 11,000 jobs were lost in November, which was well below analysts' estimates. In addition the unemployment rate actually fell to 10%, which helped to support the favorable NFP figures. This month, traders are looking for another moderate decline in payrolls, with the average consensus calling for a loss of 25,000 jobs in December -- although there are some traders looking for slight gains in payrolls last month. In addition to the headline figures, analysts will be focusing on the average number of hours worked, as any increase could be a sign that economic activity is improving, if employers increase hours worked. Yesterday's jobless claims figures did little to move Treasuries, as jobless claims rose a scant 1,000 last week - but nonetheless better than the 8,000 gain expected. Although recent reports seem to show that the U.S. is slowly emerging from the worst of the recession, unemployment rates hovering near 10% are not acceptable to the Federal Reserve officials, and any interest rate increases by the Fed most likely will not occur until we have several months of increasing payrolls, as well as a steady decline in the unemployment rate.

Trading Ideas

Since the beginning of December, Ten-Year Note futures have fallen nearly 5 full points, as traders have turned bearish on Treasury futures after looking at record U.S. budget deficits and fearing rising inflation -- especially as it appears the U.S. is slowly coming out if its recession and the Fed will have to eventually end its accommodative stance. However, this large speculative short position may be the fuel for a short-covering rally, especially if the NFP report does not live up to expectations. Some traders looking for a bullish contrarian play may want to consider the Ten-Year Note options market for strategies that could benefit from a recovery in Ten-Year Note prices. An example of such a trade would be buying a March Ten-Year Note 116 call. With March Ten-Years trading at 115-26 as of this writing, the March 116 call could be purchased for 1-00, or $1,000 per option, not including commissions. The premium paid is the maximum risk on the trade, and some more risk averse traders may wish to consider selling a March 118 call against the long 116 call to help offset some of the premium paid for the long call.

Technicals

Looking at a daily continuation chart for Ten-Year Note futures, we notice prices holding below both the 20 and 100-day moving averages, which signals that both long and short-term bears remain in control. However, the market appears to be attempting to consolidate just above the 115-00 level in the March contract, as attempts to push prices below this level have failed to hold. In addition, the downtrend line drawn from the recent highs of 121-215 made on November 27th have been taken out on the upside, which could be a signal that the selling pressure is starting to run its course -- at least in the short-term. The 14-day RSI has moved above oversold territory, but is still reading a rather weak 37.51. The December 31st lows of 114-285 look to be critical support, with major resistance found at the 100-day moving average near the 118-00 level.

Mike Zarembski, Senior Commodity Analyst