Goldman: Jobs Report Reinforces Upside Skew To Yields

Goldman Sachs note that “the July employment report was strong both in the headline, and in details. Nonfarm payrolls came in more than double expectations (with upward revisions to prior months), and the unemployment rate declined to 3.5%, the lowest level since 1969. Average hourly earnings rose 5.2% yoy, which combined with the strength in employment numbers indicates an overheated labor market. Yields jumped following the report’s release, reinforcing the recent pattern of bearish price action on employment and CPI data releases, which have recently tended to surprise to the upside. The rates market has rebuilt more premium for a 75bp hike at the September FOMC and pushed the terminal rate about 20bp higher.”

• “We had previously noted that Fed pricing around March 2023 should be somewhat sticky (and recommended selling Eurodollar calls); although the rally over the past month had dragged these forward yields lower, they have since recovered, and we continue to believe downside to terminal rate pricing is limited. Beyond the front end, even with Friday’s selloff markets are still pricing a relatively low nominal long run rate - 5y5y OIS is at the Fed’s projection of 2.50%. A decomposition of these intermediate yields suggests that much of the recent decline comes from deeply negative risk premia. Such low levels of premia have historically indicated poor returns to owning duration in the subsequent year or two. Given this, we are more inclined to trade duration with a short bias, though the preponderance of growth data (that have tended to surprise to the downside) in the latter half of the month may offer better entry levels.”