Morning Notes

The significance of tomorrow’s payroll number hasn’t diminished, but expectations are lower than they were two weeks ago, which skews bond yield risk to the upside on a larger print.

The ADP private payroll survey isn’t always an accurate predictor of monthly non-farm payrolls, but today’s miss clearly lowers the bar for Friday.

Light attendance and a relatively light catalyst calendar over the past two weeks have mostly led to trend continuation, but the sleepy dynamic ends with Friday’s release of August payrolls.

Attendance and participation are expected to stay light this week heading into the long holiday weekend.  This happens every year and market trends often look entirely different when participation returns to normal on Tuesday.

The S&P 500 Value Index (SVX) began a 3-month period of consolidation in early-May when bond yields started to decline. The consolidation in the SVX was notably shallow given the relatively steep decline in yields.

After ~3 months of consolidation, the S&P 500 Value Index (SVX) is set up for a technical breakout. The S&P 500 Financials Index (easier to follow as ETF symbol IYF) has already broken out with banks trading at ~1.4x Tangible Book Value vs. their long-term

Ten-year Treasury yields closed just above technical resistance levels in the 1.28%-1.32% range yesterday. A more significant breakthrough is required before 10-year yields advance to stronger secondary resistance near ~1.45%.

As previewed, Financials (banks) outperformed on Friday and thus far today after the upside in July payrolls drove bond yields and expectations for improved Net Interest Income (NII).

Yesterday, we suggested a non-farm payroll print north of +900,000 would likely take the 10-year Treasury to 1.28%-1.30%, lead to a sell-off in the NDX and lead to a sustained rally in cyclical/value sectors, particularly banks.  

Consensus expectations for tomorrow’s release of non-farm payrolls is now +862,500. Consensus for the Unemployment Rate is 5.7% (down from 5.9% in June), an unchanged average workweek at 34.7 hours and a +0.3% month-over-month increase in wages/+3.9% year-over-year (vs. +0.3% and +3.6% in June).