U.S. bonds gain on weak non-farm employment

The U.S. Treasuries strengthened Wednesday after the data showed weaker-than-expected April ADP non-farm employment change. Also, tumbling crude oil prices drove investors towards safe-haven assets. The yield on the benchmark 10-year bonds fell 2 bps to 1.786 pct and the yields on 3-year bonds down 1 bps to 0.896 pct by 1235 GMT.

The ADP non-farm employment estimate decreased to 156k in April, which is below the market expectation of 195k, from revised 194k increase seen in March (previous was 200k). On the other hand, despite the weaker than expected increase seen in the headline reading, investors anticipate a 210k increase in non-farm payrolls on Friday, coupled with a 5pct headline unemployment rate. Moreover, the March Commerce Department trade balance report recorded downward pressure in the deficit to $40.4 billion, lower than the market expectation of $41.2 billion deficit, as compared to the revised deficit of $47.0 billion (previous was -$47.1 billion).

Yesterday, Federal Reserve Bank President Williams said that continuation of recent data would be enough for him to support a June hike and expects GDP to be around 2% in 2016. He further added that jobs market is improving and looking for good signs on inflation, expects the Fed to raise rates gradually. Similarly, Federal Reserve Bank of Atlanta President Dennis Lockhart (non-voter) said that Fed will know relatively little about Q2 by the June FOMC and thinks remaining 3 quarters will show a rebound in GDP. He further added that June is still alive and would put more probability on June than the market is pricing in. April statement positioned Fed well and retains the options of moving in June but acknowledging uncertain events like Brexit and it is too soon to say whether Fed is seeing needed inflation progress, he added.

Today, crude oil prices tumbled on concerns that slowing demand and rising Middle East production would extend a global supply overhang. The United States crude inventories rose by 1.3 million barrels in the week to April 29 to 539.7 million barrels, according to data from the American Petroleum Institute, which further weakened the investor sentiments. Also, Iraq said that its oil shipments from southern fields averaged 3.364 million barrels per day in April, up from 3.286 million in March and production from top exporter Saudi Arabia was 10.15 million barrels per day in April. The International benchmark Brent futures fell to $44.97, from yesterdays $45.56 and West Texas Intermediate (WTI) declined to $ 43.72, against yesterdays $44.40.

The markets will now focus on the up-coming April service PMI (1345 GMT), March factory order and ISM non-manufacturing PMI (1400 GMT). Meanwhile, S&P 500 Futures fell 12.75 pts to 2,044 by 1235 GMT.