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It's All Up to Non-Farm Payrolls

Will nonfarm payrolls finally kill the short stocks/long Treasurys arbitrage?

We may be on the verge of unwinding the most successful trade of the summer. For four long months, one trade has worked better than any other, and today it is showing signs of fraying.

Here's what traders are telling me:

1) They have been short stocks and long US Treasurys;

2) They have done well with this trade, but we are now approaching year end...strength in overseas economic numbers (India, China, Australia) and a surprisingly strong ISM is a wake-up call...they need to lock in profits and stay away from potential dangers in the September-October period;

3) Non-farm payrolls on Friday become critical to continue to reverse this trade...consensus is for a loss of 120,000 jobs, with a private sector gain of 44,000 jobs. If we get any kind of tick notably better than these, stocks will rally again and Treasury note yields will rise another 50 to 75 basis points.

It's all up to nonfarm payrolls.

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