Fixed Income traders must be thanking the stars for the huge disappointment brought about by the latest US NFP numbers. Analysts were expecting a close to 200K print, but the actual number came in at less than half of what was expected, at 87K. This decline spurred speculation that the Fed will hold off taper #2, driving Treasury yields lower and pushing the 10Y implied yield further away from the 3% mark once more. Whether this interpretation of the Fed's tapering preference is moot, as Fixed Income traders likely used this opportunity to press hard since it is clear that they will defend the 3% line to the hilt.
Not that they needed help though. 10Y Futures prices show that 124.0 has been holding on tightly for a while, with prices managing to push up higher to as high as 124.68 mid-week last week, before "hawkish" FOMC minutes drove prices back to 124.0 once again. Considering that the aforementioned level managed to hold despite strong news to the contrary, it is no surprise that the bullish reaction to the NFP was so strong.
However, overall bearish pressure remains, as QE is still expected to end by 2015 if not 2014. Even if taper #2 is delayed by a month or even a quarter, it doesn't change the fact that the Fed wants to wean the market off the QE supplement eventually. From a technical perspective, prices have managed to clear the Channel Top, but the failure to overcome the 125.5 soft resistance favors a pullback toward the Channel Top once again - a scenario that is echoed by Stochastic indicators that favor bearish scenarios moving forward with the Stoch curve already within the Overbought region.
That being said, there is no strong evidence that price is currently moving lower, and we should see price hitting below 125.0 in conjunction with the Stoch curve below 80.0 before eliminating the possibility of price testing 125.5 in a more significant manner in the short-term.
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