Today’s June employment report did not disappoint; always a dart
throwing event, the data today followed the normal path of wild deviations from
estimates. One thing we can count on with the monthly employment data. The
June unemployment rate unchanged at 7.6% (estimates 7.5%), non-farm jobs
increased 195K (estimate 165K), non –farm private jobs +202K (estimates 179K).
May jobs were revised to +195K from 175K, April revised up an additional 50K. At
9:00 this morning the 10 yr note traded at 2.65% +14 bp from Wednesday’s close.
At 9:00 the 4.0 FNMA coupon -93 bps, 3.5 coupon -128 bps. US stock indexes
higher, DJIA +78 at 9:00 but well off the initial reaction.
Retailers, professional and business services, health care and
leisure and hospitality businesses led the payroll gains in June.
Manufacturers cut jobs for a fourth straight month and government payrolls
dropped. The household survey, used to calculate the unemployment rate, showed
that more people entered the labor force and most of them were able to find
work. According to BLS 177K entered the labor market and 160K were hired.
Factories lost 6K jobs in June while construction companies added 13K, the most
in three months. Automakers boosted employment by 5,100 workers, the most in
four months. Retailers added 37K jobs in June, with most of the increase coming
from more hiring at motor vehicle dealerships and home-improvement outlets.
Not much good news in Europe; yesterday the European
Central Bank President Mario Draghi said yesterday that the risks to the
euro-area economy are to the downside as he gave “unprecedented” forward
guidance that interest rates will stay low for an extended period of time. The
economy in the currency bloc, Germany’s biggest export market, contracted in
the six quarters through March. Draghi reaffirmed his prediction for a recovery
at a subdued pace later this year. German factory orders unexpectedly declined
for a second month in May in a sign that the euro area’s struggle to emerge
from its longest-ever recession isn’t improving much.
At 9:30 the DJIA opened +111, NASDAQ +24, S&P +11. The 10 yr note at
2.68% +17 bps, 30 yr 4.0 FNMA coupon -103 bps.
What will the Fed do now? The obvious is that the Fed will
begin tapering soon, but that may not be the final decision. The huge increase
in mortgage rates is going to slow housing markets, already a high percentage
of would be qualifiers have been left on the sidelines, and possibly slowing
growth. Already this morning markets are struggling with the relationship
between the new level of interest rates and the impact on the economy. The
initial reaction to the 8:30 employment data had the DJIA up over 180 points,
at 10:00 the stock indexes were declining from those reactionary highs as
traders attempt to measure the economy with increasingly higher interest rates.
Could the Fed hold the line and not taper to keep the economy and the housing
market from reversing and slipping in growth because rates are increasing too
rapidly?
This morning a new high for the 10 yr note at 2.71% up 20 basis
points from Wednesday and more evidence that talking fundamentals won’t get the job
done; for all the talk from various experts that the bond market was a buying
opportunity all of our technical models and indicators remained bearish. The
take away is simple but to some a mystery; it isn’t complicated, it is just
ignoring the talk and focusing on where money is going---that is all technicals
are. Where is the money, not who is talking.
- Michael Corboy
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