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Global Perspectives
2011 Growth Thesis to Be Tested in 2Q
We expect 2Q11 to be an inflection point for developed market economies and for bond markets alike. Simply, it’s the quarter where the rising growth thesis for 2011 will be tested, and we would go so far as to say it’s the most critical quarter of the year. 2Q11 also represents the start of the removal of stimulus and accommodative polices. The market is currently priced to look past the setbacks in 1Q and make up lost ground in the following quarters – but data in 2Q will reveal how likely that is.
Duration: We question whether carry and roll-down earned from bonds in present steep yield curves can compensate for higher rates during hiking cycles.
Inflation: Global inflationary pressures remain strong. Carry favors buying JGBi breakevens and entering BTPei 5-30y breakeven flatteners. We think 30y TIPS are cheap and advocate a 5-30y BEI steepener. Finally, we like owning 2y1y TIPS BEIs.
Treasuries: We model 10y yields incorporating Fed funds expectations, realized inflation, and longer-term inflation expectations. Based on this model, we find that 10s are slightly cheap. Further, we estimate that the 10s30s curve remains ~15bp too steep.
Vol: We retain our bearish bias on the front end of the Europe and UK curves and still believe that the US front end can move higher. We recommend positioning with 1x2 payor spreads globally.
Euro sovereigns: We highlight the good and the bad news from recent EU meetings and Irish bank stress tests.
MBS: We find that a yield curve flattening has historically caused 30y mortgages to outperform 15y’s and low coupons to outperform high coupons.
Japan: We provide our second ‘post-quake’ update, and assess growth prospects from here.
AXJ: we recommend initiating curve steepeners following the fallout from the Japanese earthquake
Growth & Inflation Thesis to Be Put to the Test in 2Q11
Jim Caron, Global Head of Interest Rate Strategy
We expect 2Q11 to be an inflection point for developed market economies and for bond markets alike. Simply, it’s the quarter where the rising growth thesis for 2011 will be tested – and we would go so far as to say it’s the most critical quarter of the year. The market is currently priced to look past the setbacks in 1Q and make up lost ground in the following quarters, but data in 2Q will reveal how likely that is.
2011 is off to a challenging start. In the US, 1Q GDP is tracking 2.3% from our original estimate of 4.5% after the 4Q GDP data were released. So, the onus is on 2Q for a strong rebound if consensus expectations of 3.5% growth and 8.5% unemployment are to be reached; otherwise forecasts are at risk of being downgraded. And 2Q will determine whether the US has enough momentum to grow beyond the wind-down of fiscal stimulus and the end QE2 – the pricing for which will likely take place by mid-2Q. Similarly, in the UK, GDP growth is tracking 0.8% from an original estimate of 2.8%, which followed a disappointing -2.0% in 4Q. The Eurozone is the exception, but the test will be whether robust 1Q growth has the organic momentum to continue into 2Q or if it begins to falter as the ECB starts a campaign to hike rates (Exhibit 1). It is also when the market will get a better handle on discounting the global economic impacts of the devastating earthquake in Japan and the conflict in the Middle East. We suspect the market will digest and discount these risks in Q2 and establish a trajectory for the remainder of the year.
What’s In the Price: Growth and Inflation Dominate the Landscape
Clearly, 2011 got off to a challenging start given: i) weaker than expected growth in some developed economies, ii) the shock of higher oil prices, iii) conflict in the Middle East, and iv) the earthquake in Japan. Still, MS forecasts remain robust as outlined by our chief economist, Joachim Fels. Here’s how the risks are shaping up at the onset of 2Q:
Policy – The ECB is expected to hike 25bps starting in April for a total of 75bps this year. The MPC is expected to hike 25bps in August for a total of 50bps this year. The Fed is not expected to hike until 1Q12 (Exhibit 2).
Rates & Curves – Upward bias for yields with the exception of Japan. Our year-end government 10yr yield forecasts are close to consensus: 4.00% in the US, 4.20% in the UK, 3.55% in Germany, and 1.10% in Japan. Curves (2s10s) are priced to flatten in each of the currencies (Exhibit 3).
Global recovery remains on track – Events in Japan and in the MENA region (given their impact on oil) pose challenges to global growth, but the initial conditions matter. Going into these events the global economy was in a strengthening cycle, monetary and fiscal policy was accommodative on a global scale, the cap-ex cycle was in full swing, and labour markets were improving. Uncertainties remain in Japan, but despite the human suffering, the impact to global growth may be muted. Exports to Japan account for only 4% of world trade and 1% of global GDP.
Inflation – Global uncertainties create upside risk to inflation. The genesis of this risk is higher energy prices or supply shocks from the earthquake in Japan. Supply shocks add to cost pressures and are passed through to wages in EM, which in turn, cycles back to DM inflation pressures.
The risk is that higher energy prices stymie growth expectations and create stagflation, which may reduce the degree of curve flattening priced into the market.
Removing Accommodation but Optimism Abounds
2Q11 represents the start of a removal of stimulus and accommodative policies. The ECB is likely to hike rates in April, and QE2 seems sure to come to an end. Market consensus expectations remain intact for stronger growth and falling risk premiums, judging by the still strong performance of riskier assets. But to us, the story is not that simple. We do not think the threat to DM growth is properly discounted. Unless data markedly improve in 2Q for the US and UK and the Eurozone economy is able to withstand rate hikes, then the risk is for a downgrade to growth forecasts. What makes this risk so acute is that consensus expectations have remained lofty and risk premiums low – ignoring signs of setbacks during Q1.
In the US we will take our cue from the jobs market. The US labor market has fallen short of adding the required +200K jobs per month necessary for the consensus 8.5% unemployment rate to be met. The Household survey, on which the unemployment rate is based, has shown solid gains and, as a result, the unemployment rate has fallen. But the Establishment survey and Household survey need to make progress toward converging in 2Q to keep 2011 growth and employment expectations intact. Based on March’s NFP release of +216K jobs and including +7K in upward revisions, April needs to produce +287K jobs in next month’s NFP release. This is certainly do-able, especially when you consider that there may be payback in jobs from bad weather in 1Q. As a result, optimism for 2011 growth will abound over the coming weeks – keeping upward pressure on yields, especially in the front-end, as traders start to price the exit strategy from the Fed that will likely culminate in a rate hike in 1Q12 (or perhaps sooner).
Conclusion. We think 2Q represents an inflection point that may break the trading range. Near term, we prefer to be tactical and believe rates can rise from current levels, but we are looking to buy into weakness. Unless data dramatically strengthen beyond already lofty consensus expectations, higher rates represent a buying opportunity. The level of front-end rolldown trades still looks attractive to us, but we prefer to wait for a better rate level to buy. We think curves will flatten, and our top pick is a UST 10s30s flattener because it is not yet as crowded as the 2s10s flatteners in Europe and the UK.
Carry & Roll Are Not Enough
As markets approach the beginning of the tightening cycle – soon in the euro area, and eventually in the UK and the US – investors naturally wonder whether they can justify continuing to own bonds.
The question is, can the carry and roll-down earned from bonds in present steep yield curves compensate (or over-compensate) for the capital losses associated with rising yields?
Therefore, we look at the historical experience of bond returns during rate hiking cycles. Although superficially encouraging, we conclude that a hard look at the historical evidence means that investors should expect negative returns relative to cash; and negative absolute returns, in Europe and the US.
Total returns have been positive during previous hiking cycles… Looking at historical returns of 2-year bonds, it is indeed true that most of the time total returns have been positive even while rates have been rising, as is shown by the blue bars in Exhibit 1 which shows the experience of 2-year German government bond returns since 1987 (green shading emphasises when the 3-month annualised total return of the 2-year was negative).
….but not excess returns However, Exhibit 1 also shows that, contrary to their total returns 2-years’ excess returns versus cash usually are negative during rate hike cycles (yellow shading).
This matters for two reasons. First, because it helps us to anticipate what is likely to happen during the rate hike cycle that lies ahead; and second because excess return vs cash is a more relevant guide to investor behaviour than absolute returns.
Previous excess returns a good guide to this cycle’s absolute returns Because yields today are so low, the experience of excess returns will be a better guide than that of total returns. With yields now very low versus historical norms, the coupon (or, more accurately, the current yield) that usually provides a cushion against capital losses and keeps total returns positive during the hiking cycle is much thinner this time around.
To put it another way, the same rise in yield is more likely to produce a negative total return in 2011-12 than in previous tightening cycles, because yields start off this cycle so low.
Hence, looking at past excess returns over cash gives a better idea than past total returns of what to expect during the coming cycle – and it’s not encouraging.
As Exhibit D2 shows, during all the hiking cycles in Germany then Europe since 1978 (Bundesbank then ECB), the average annualised 3-month excess return over cash has been negative across the curve to the tune of -1.3% in 2s, -1.9% in 5s and -1.2% in 10s. And excess returns across the curve during hiking cycles have been negative 67% of the time (Exhibit 2).
Likewise during all the US hiking cycles since 1976, the average annualised 1-month excess return over cash has been -3.0% -5.9% -6.0% in 2s, 5s, and 10s. And excess returns across the curve during hiking cycles have been negative 65% of the time (Exhibit 3).
Excess returns are more relevant for most bond investors The second reason why excess returns versus cash matter more than total returns is because they speak to investor behaviour. Most fixed income fund managers don’t typically have the ability (or desire) to take their fund size to nothing (though multi-asset fund managers can switch into equities, for example): but they can move into cash. So, for them the relevant question is not ‘what will total returns be?’ but ‘what will excess returns versus cash be?’
Exhibit 3
Poor Hike Cycle Excess Returns: US
Source: Morgan Stanley Research
Historical evidence argues that cash has mostly outperformed bonds along the curve during hiking cycles. Carry and roll has, historically, not provided enough of a cushion to challenge that.
In this context, the argument that rate hikes are already ‘in the price’ already rings a little out of tune.
Conclusion Some tightening obviously is embedded in forwards. But a hefty premium over money market rates is something one always finds at the beginning of a rate hike cycle. What’s notable about the present situation is that this premium is lower now than it was at the beginning of previous hiking cycles, in both Europe (see Exhibit 1, upper panel) and in the US – despite the fact that the starting point for this cycle is the lowest since before World War II.
This, together with the experience of previous cycles, argues that holders of core government bonds should expect to earn negative excess returns versus cash and quite probably negative absolute returns too, in coming months.
Treasuries: 10y a Bit Cheap but Not Beyond One Standard Deviation
Exhibit 1
Continued Revisions to 1Q11 GDP Drove 10y UST Yields Lower in Q1
10y Yields Have Closely Followed MS GDP Tracking Estimates In Q1…
Over the past two months, 10y Treasury yields traded in a 50bp range of 3.2-3.7%, starting the year at the top end of this range on the back of lofty expectations for Q1 GDP, which our US economists initially penciled at 4.5% QoQ SAAR, but then driven all the way down to 1.9% QoQ SAAR on the back of worse-than-expected retail sales and employment (Exhibit 1). The latter revisions stemmed primarily from bad weather, which ended up taking as much as 1-1.5% off of Q1 growth, and along with the tragic events in Japan, 10y yields rallied to as low as 3.2%. Today, 10y yields are back to the middle of their 2-month range at 3.47%, where to from here?
10y Yields Are Slightly Cheap On Our Regression-Based Model – But Not Beyond a Single Standard Deviation of the Residual – Remain Neutral for Now
To answer this question, we construct a regression-based model whose residual we use to assess where 10y yields are rich or cheap here. Our model incorporates Fed funds expectations via 1y1y OIS, realized inflation prints via 2y inflation swaps, and longer-term inflation expectations via 5y5y inflation breakevens. Not surprisingly, we find that while 10y yields are slightly cheap on our model, the level of cheapness is not outside a single standard deviation of the residual (Exhibit 2). This seems consistent with the fact that 10y yields are back to the middle of their 2M range.
The slight cheapness likely stems from the market setup into the March NFP print, where a similar setup occurred ahead of the February print. Subsequent negative revisions to the Q1 GDP number then forced yields back down on the back of the disappointment, and the market is at some risk of seeing the same happen this time around. However, given that 10y yields are not outside the +/- 1 standard deviation bounds, we remain neutral for now. A reversal of the inclement weather headwinds in Q1 can become a tailwind in Q2, which may still cause 10y yields to overshoot higher from here, albeit we note that a decent amount of this is already in the price.
What about the positive surprise in March NFP? With the March NFP surprising to the upside by 26K (216K vs. consensus of 190K), and with only mild revisions to the prior months, investors do not have much to fear. That is because in 2004, it took great positive surprises in payrolls – on the order of >80K – before the Treasury market really began to sell off, be it in the front-end or the back-end (Exhibit 3). We therefore need to see a consistency in the better economics data, and upside surprises that are greater than 26K in the NFP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Global Perspectives
2011 Growth Thesis to Be Tested in 2Q
We expect 2Q11 to be an inflection point for developed market economies and for bond markets alike. Simply, it’s the quarter where the rising growth thesis for 2011 will be tested, and we would go so far as to say it’s the most critical quarter of the year. 2Q11 also represents the start of the removal of stimulus and accommodative polices. The market is currently priced to look past the setbacks in 1Q and make up lost ground in the following quarters – but data in 2Q will reveal how likely that is.
Duration: We question whether carry and roll-down earned from bonds in present steep yield curves can compensate for higher rates during hiking cycles.
Inflation: Global inflationary pressures remain strong. Carry favors buying JGBi breakevens and entering BTPei 5-30y breakeven flatteners. We think 30y TIPS are cheap and advocate a 5-30y BEI steepener. Finally, we like owning 2y1y TIPS BEIs.
Treasuries: We model 10y yields incorporating Fed funds expectations, realized inflation, and longer-term inflation expectations. Based on this model, we find that 10s are slightly cheap. Further, we estimate that the 10s30s curve remains ~15bp too steep.
Vol: We retain our bearish bias on the front end of the Europe and UK curves and still believe that the US front end can move higher. We recommend positioning with 1x2 payor spreads globally.
Euro sovereigns: We highlight the good and the bad news from recent EU meetings and Irish bank stress tests.
MBS: We find that a yield curve flattening has historically caused 30y mortgages to outperform 15y’s and low coupons to outperform high coupons.
Japan: We provide our second ‘post-quake’ update, and assess growth prospects from here.
AXJ: we recommend initiating curve steepeners following the fallout from the Japanese earthquake
Growth & Inflation Thesis to Be Put to the Test in 2Q11
Jim Caron, Global Head of Interest Rate Strategy
We expect 2Q11 to be an inflection point for developed market economies and for bond markets alike. Simply, it’s the quarter where the rising growth thesis for 2011 will be tested – and we would go so far as to say it’s the most critical quarter of the year. The market is currently priced to look past the setbacks in 1Q and make up lost ground in the following quarters, but data in 2Q will reveal how likely that is.
2011 is off to a challenging start. In the US, 1Q GDP is tracking 2.3% from our original estimate of 4.5% after the 4Q GDP data were released. So, the onus is on 2Q for a strong rebound if consensus expectations of 3.5% growth and 8.5% unemployment are to be reached; otherwise forecasts are at risk of being downgraded. And 2Q will determine whether the US has enough momentum to grow beyond the wind-down of fiscal stimulus and the end QE2 – the pricing for which will likely take place by mid-2Q. Similarly, in the UK, GDP growth is tracking 0.8% from an original estimate of 2.8%, which followed a disappointing -2.0% in 4Q. The Eurozone is the exception, but the test will be whether robust 1Q growth has the organic momentum to continue into 2Q or if it begins to falter as the ECB starts a campaign to hike rates (Exhibit 1). It is also when the market will get a better handle on discounting the global economic impacts of the devastating earthquake in Japan and the conflict in the Middle East. We suspect the market will digest and discount these risks in Q2 and establish a trajectory for the remainder of the year.
What’s In the Price: Growth and Inflation Dominate the Landscape
Clearly, 2011 got off to a challenging start given: i) weaker than expected growth in some developed economies, ii) the shock of higher oil prices, iii) conflict in the Middle East, and iv) the earthquake in Japan. Still, MS forecasts remain robust as outlined by our chief economist, Joachim Fels. Here’s how the risks are shaping up at the onset of 2Q:
Policy – The ECB is expected to hike 25bps starting in April for a total of 75bps this year. The MPC is expected to hike 25bps in August for a total of 50bps this year. The Fed is not expected to hike until 1Q12 (Exhibit 2).
Rates & Curves – Upward bias for yields with the exception of Japan. Our year-end government 10yr yield forecasts are close to consensus: 4.00% in the US, 4.20% in the UK, 3.55% in Germany, and 1.10% in Japan. Curves (2s10s) are priced to flatten in each of the currencies (Exhibit 3).
Global recovery remains on track – Events in Japan and in the MENA region (given their impact on oil) pose challenges to global growth, but the initial conditions matter. Going into these events the global economy was in a strengthening cycle, monetary and fiscal policy was accommodative on a global scale, the cap-ex cycle was in full swing, and labour markets were improving. Uncertainties remain in Japan, but despite the human suffering, the impact to global growth may be muted. Exports to Japan account for only 4% of world trade and 1% of global GDP.
Inflation – Global uncertainties create upside risk to inflation. The genesis of this risk is higher energy prices or supply shocks from the earthquake in Japan. Supply shocks add to cost pressures and are passed through to wages in EM, which in turn, cycles back to DM inflation pressures.
The risk is that higher energy prices stymie growth expectations and create stagflation, which may reduce the degree of curve flattening priced into the market.
Removing Accommodation but Optimism Abounds
2Q11 represents the start of a removal of stimulus and accommodative policies. The ECB is likely to hike rates in April, and QE2 seems sure to come to an end. Market consensus expectations remain intact for stronger growth and falling risk premiums, judging by the still strong performance of riskier assets. But to us, the story is not that simple. We do not think the threat to DM growth is properly discounted. Unless data markedly improve in 2Q for the US and UK and the Eurozone economy is able to withstand rate hikes, then the risk is for a downgrade to growth forecasts. What makes this risk so acute is that consensus expectations have remained lofty and risk premiums low – ignoring signs of setbacks during Q1.
In the US we will take our cue from the jobs market. The US labor market has fallen short of adding the required +200K jobs per month necessary for the consensus 8.5% unemployment rate to be met. The Household survey, on which the unemployment rate is based, has shown solid gains and, as a result, the unemployment rate has fallen. But the Establishment survey and Household survey need to make progress toward converging in 2Q to keep 2011 growth and employment expectations intact. Based on March’s NFP release of +216K jobs and including +7K in upward revisions, April needs to produce +287K jobs in next month’s NFP release. This is certainly do-able, especially when you consider that there may be payback in jobs from bad weather in 1Q. As a result, optimism for 2011 growth will abound over the coming weeks – keeping upward pressure on yields, especially in the front-end, as traders start to price the exit strategy from the Fed that will likely culminate in a rate hike in 1Q12 (or perhaps sooner).
Conclusion. We think 2Q represents an inflection point that may break the trading range. Near term, we prefer to be tactical and believe rates can rise from current levels, but we are looking to buy into weakness. Unless data dramatically strengthen beyond already lofty consensus expectations, higher rates represent a buying opportunity. The level of front-end rolldown trades still looks attractive to us, but we prefer to wait for a better rate level to buy. We think curves will flatten, and our top pick is a UST 10s30s flattener because it is not yet as crowded as the 2s10s flatteners in Europe and the UK.
Carry & Roll Are Not Enough
As markets approach the beginning of the tightening cycle – soon in the euro area, and eventually in the UK and the US – investors naturally wonder whether they can justify continuing to own bonds.
The question is, can the carry and roll-down earned from bonds in present steep yield curves compensate (or over-compensate) for the capital losses associated with rising yields?
Therefore, we look at the historical experience of bond returns during rate hiking cycles. Although superficially encouraging, we conclude that a hard look at the historical evidence means that investors should expect negative returns relative to cash; and negative absolute returns, in Europe and the US.
Total returns have been positive during previous hiking cycles… Looking at historical returns of 2-year bonds, it is indeed true that most of the time total returns have been positive even while rates have been rising, as is shown by the blue bars in Exhibit 1 which shows the experience of 2-year German government bond returns since 1987 (green shading emphasises when the 3-month annualised total return of the 2-year was negative).
….but not excess returns However, Exhibit 1 also shows that, contrary to their total returns 2-years’ excess returns versus cash usually are negative during rate hike cycles (yellow shading).
This matters for two reasons. First, because it helps us to anticipate what is likely to happen during the rate hike cycle that lies ahead; and second because excess return vs cash is a more relevant guide to investor behaviour than absolute returns.
Previous excess returns a good guide to this cycle’s absolute returns Because yields today are so low, the experience of excess returns will be a better guide than that of total returns. With yields now very low versus historical norms, the coupon (or, more accurately, the current yield) that usually provides a cushion against capital losses and keeps total returns positive during the hiking cycle is much thinner this time around.
To put it another way, the same rise in yield is more likely to produce a negative total return in 2011-12 than in previous tightening cycles, because yields start off this cycle so low.
Hence, looking at past excess returns over cash gives a better idea than past total returns of what to expect during the coming cycle – and it’s not encouraging.
As Exhibit D2 shows, during all the hiking cycles in Germany then Europe since 1978 (Bundesbank then ECB), the average annualised 3-month excess return over cash has been negative across the curve to the tune of -1.3% in 2s, -1.9% in 5s and -1.2% in 10s. And excess returns across the curve during hiking cycles have been negative 67% of the time (Exhibit 2).
Likewise during all the US hiking cycles since 1976, the average annualised 1-month excess return over cash has been -3.0% -5.9% -6.0% in 2s, 5s, and 10s. And excess returns across the curve during hiking cycles have been negative 65% of the time (Exhibit 3).
Excess returns are more relevant for most bond investors The second reason why excess returns versus cash matter more than total returns is because they speak to investor behaviour. Most fixed income fund managers don’t typically have the ability (or desire) to take their fund size to nothing (though multi-asset fund managers can switch into equities, for example): but they can move into cash. So, for them the relevant question is not ‘what will total returns be?’ but ‘what will excess returns versus cash be?’
Exhibit 3
Poor Hike Cycle Excess Returns: US
Source: Morgan Stanley Research
Historical evidence argues that cash has mostly outperformed bonds along the curve during hiking cycles. Carry and roll has, historically, not provided enough of a cushion to challenge that.
In this context, the argument that rate hikes are already ‘in the price’ already rings a little out of tune.
Conclusion Some tightening obviously is embedded in forwards. But a hefty premium over money market rates is something one always finds at the beginning of a rate hike cycle. What’s notable about the present situation is that this premium is lower now than it was at the beginning of previous hiking cycles, in both Europe (see Exhibit 1, upper panel) and in the US – despite the fact that the starting point for this cycle is the lowest since before World War II.
This, together with the experience of previous cycles, argues that holders of core government bonds should expect to earn negative excess returns versus cash and quite probably negative absolute returns too, in coming months.
Treasuries: 10y a Bit Cheap but Not Beyond One Standard Deviation
Exhibit 1
Continued Revisions to 1Q11 GDP Drove 10y UST Yields Lower in Q1
10y Yields Have Closely Followed MS GDP Tracking Estimates In Q1…
Over the past two months, 10y Treasury yields traded in a 50bp range of 3.2-3.7%, starting the year at the top end of this range on the back of lofty expectations for Q1 GDP, which our US economists initially penciled at 4.5% QoQ SAAR, but then driven all the way down to 1.9% QoQ SAAR on the back of worse-than-expected retail sales and employment (Exhibit 1). The latter revisions stemmed primarily from bad weather, which ended up taking as much as 1-1.5% off of Q1 growth, and along with the tragic events in Japan, 10y yields rallied to as low as 3.2%. Today, 10y yields are back to the middle of their 2-month range at 3.47%, where to from here?
10y Yields Are Slightly Cheap On Our Regression-Based Model – But Not Beyond a Single Standard Deviation of the Residual – Remain Neutral for Now
To answer this question, we construct a regression-based model whose residual we use to assess where 10y yields are rich or cheap here. Our model incorporates Fed funds expectations via 1y1y OIS, realized inflation prints via 2y inflation swaps, and longer-term inflation expectations via 5y5y inflation breakevens. Not surprisingly, we find that while 10y yields are slightly cheap on our model, the level of cheapness is not outside a single standard deviation of the residual (Exhibit 2). This seems consistent with the fact that 10y yields are back to the middle of their 2M range.
The slight cheapness likely stems from the market setup into the March NFP print, where a similar setup occurred ahead of the February print. Subsequent negative revisions to the Q1 GDP number then forced yields back down on the back of the disappointment, and the market is at some risk of seeing the same happen this time around. However, given that 10y yields are not outside the +/- 1 standard deviation bounds, we remain neutral for now. A reversal of the inclement weather headwinds in Q1 can become a tailwind in Q2, which may still cause 10y yields to overshoot higher from here, albeit we note that a decent amount of this is already in the price.
What about the positive surprise in March NFP? With the March NFP surprising to the upside by 26K (216K vs. consensus of 190K), and with only mild revisions to the prior months, investors do not have much to fear. That is because in 2004, it took great positive surprises in payrolls – on the order of >80K – before the Treasury market really began to sell off, be it in the front-end or the back-end (Exhibit 3). We therefore need to see a consistency in the better economics data, and upside surprises that are greater than 26K in the NFP.
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