Treasury yields and the dollar rose, equities were becalmed and volatility and gold tumbled as markets bet that Friday's payrolls number will reinforce the case for a Fed rate hike this year.
Bond prices dropped for the fifth day in a row pushing the yield on the 10-year up 4 basis points to 1.7372 percent on Thursday, its highest close since June 23rd. The 2-year added 2 points to 0.8496, its best finish since June 2nd.
The yield on the commercial touchstone 10-year bond has gained 42 basis points since its July 6th low at 1.3682 and 20 points in the last five session after its intra-day bottom at 1.5342 on September 30th. Returns on the 2-year have risen less, 32 points since July 6th and 13 in the last five days, providing the yield curve with a moderate steepening.
The dollar vaulted to 104.16 against the yen, and ended at 103.95 its best since July 28th. The euro fell to 1.1150 the weakest versus the dollar since September 20th.
Equites erased their early losses with the Dow finishing down 12.53 at 18,268.50 having been lower by over 100 points at the open. The S&P 500 gained 1.04 points to 2,160.77 and the Nasdaq Composite dropped 9.17 points at 5,306.85.
Gold lost $12.47 to $1,254.38 and has now lost 6.7 percent since its September 22nd high of $1343.72. The Chicago Board Options Volatility Index (VIX) closed at 12.84 down from its open of 13.11. It is off 37 percent since its mid-day high of 20.51 on September 12th.
Markets took their cue from jobless claims for the week of October 1st, which at 249,000 were the lowest in over 40 years. This level has historically been associated with strong labor markets and job creation. When combined with the steady drumbeat of rate hike talk from Fed officials over the past month, markets have become convinced that barring a large disappointment in the September or October payroll numbers, the Fed will have little choice but to keep its charge and hike 0.25 basis points at the December 14th FOMC meeting.
Although the historical relationship between claims and payrolls would suggest a robust number on Friday this relationship has weakened over the past several years. Claims have continued to trend down but payroll expansion has also slowed down.
Jobless claims averaged 309,100 in 2014. They dropped to 278,000 in 2015 and 265,500 this year. The average is the lowest since the early 1970s, when the U.S. population was about 100 million less.
But the steadily improving claims numbers have not correlated with stronger job creation. The non-farm payrolls monthly average has fallen from of 251,000 in 2014 to 229,000 in 2015 year and 182,000 so far this year.
The credit and currency markets have a one way bet at 8:30 am on Friday.
Chief Market Strategist
WorldWideMarkets Online Trading