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T-Note Bears Could Feel Further Squeeze on Weak Jobs Data

By:
James Hyerczyk
Updated: Jun 3, 2018, 07:45 UTC

Like crude oil bulls who drove prices well above and ahead of the fundamentals, T-note traders may have over-shorted the market while betting on as many as four rate hikes this year.

t note

Today’s surprise announcement that the U.S. will move forward on imposing tariffs on steel and aluminum imports from the European Union, Canada and Mexico at midnight Thursday will certainly raise issues about a trade war and its impact on the economy, which I am sure will be addressed by the U.S. Federal Reserve when it meets later in June.

In my opinion, a trade war will likely feed the dovish signals from the minutes of the central bank’s last meeting. Last week, investors lowered their expectations that the central bank will raise interest rates four times this year. This week’s political turmoil lowered expectations even further.

As of last Friday, the probability of the Fed raising rates four times in total this year fell to just 26.5 percent, having started the week above 40 percent.

The central bank has raised rates once this year and is expected to increase rates by 25 basis points in June. The big question for investors is whether the Fed’s inflation outlook will lead to one or two rate hikes after that.

If you are watching the U.S. Treasury futures market this week then you can see the impact of this question in the price action. The benchmark 10-year Treasury note futures contract soared this week after building a support base last week.

The support base was built by the reaction to the dovish Fed minutes. The upward spike in prices was fueled by the Italian bond crisis. Today’s upside momentum is being generated by trade war fears. Tomorrow’s U.S. Non-Farm Payrolls report is likely to be the next piece of news that could lead to a further rally in T-note prices and a subsequent drop in yields.

Traders expect Friday’s U.S. Non-Farm Payrolls report to show the economy added 190,000 jobs in May. The unemployment rate is expected to remain at 3.9 percent. The focus for traders, however, will be on average hourly earnings. They are expected to remain unchanged at 2.6 percent from a year ago.

Lower than expected average hourly earnings should lend a dovish tone to the jobs report. This should lead to a further drop in yields, another possible spike in T-note futures and lower expectations for more than two rates hikes later this year.

Like crude oil bulls who drove prices well above and ahead of the fundamentals, T-note traders may have over-shorted the market while betting on as many as four rate hikes this year.

It now looks as if the narrative is changing because of factors outside of the economic norm like trade wars and geopolitical turmoil. These events may have been enough to spark the first move of a major short squeeze, but conditions may get worse for T-Note shorts if the jobs report is weaker than expected especially average hourly earnings.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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