Fixed Income traders must be thanking the stars for the huge disappointment of latest US NFP numbers. Analysts were expected a close to 200K print, but the actual number came in less than half of expected at 87K. This decline spurred speculations that the Fed will hold off taper number 2, driving Treasury yields lower and pushed 10Y implied yield further away from the 3% mark once more. Whether this interpretation of Fed’s tapering preference is moot, as Fixed Income traders likely used this opportunity to press hard as it is clear that they will defend the 3% line to their hilt.
Not that they needed help though, 10Y Futures prices show that 124.0 has been holding on tightly for a while, with prices managed to push up higher to as high as 124.68 mid-week before “hawkish” FOMC minutes drove prices back to 124.0 once again. Considering that the aforementioned level managed to hold despite strong news to the contrary, it is no surprise that the bullish reaction to NFP was so strong.
However, overall bearish pressure remains, as QE is still expected to end by 2015 if not 2014. Even if taper number 2 is delayed by a month or even a quarter doesn’t change the fact that the Fed wants to wean the market off QE supplement eventually. From a technical perspective, prices have managed to clear Channel Top but the failure to overcome 125.5 soft resistance favors a pullback towards Channel Top once again – a scenario that is echoed by Stochastic indicator that favors bearish scenarios moving forward with Stoch curve already within the Overbought region. That being said, there is no strong evidence that price is currently moving lower, and we should see price hitting below 125.0 in conjunction with Stoch curve below 80.0 before eliminating the possibility of price testing 125.5 in a more significant manner in the short-term.
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