Stocks are trading near unchanged levels and Mortgage Bonds are slightly lower so far this morning. Tomorrow’s Bureau of Labor Statistics Jobs report will be key for market direction and may play a big role in whether Fed members want to see a hike or not in upcoming Fed meetings.
There has been a lot of labor data already released this week, almost all pointing to a weakening jobs market.
Revelio, which is a private data source for jobs data, showed that there were 79,000 jobs created in July, with 28,000 coming from healthcare.
ADP showed only 44,000 jobs created in July, much weaker than market estimates. Additionally, ISM released their services sector report, showing that their employment component fell from 51.2 to 47.4…which is back beneath 50 and in contraction once again.
ZipRecruiter, one of the largest job posting sites, released earnings yesterday and said that the labor market was stable in Q1, but now in Q2 it’s subdued. They pointed to a near 15-year low in hires and quits as part of the reason why they feel jobs are softening.
The one area that some are hanging their cap on is Jobless Claims. While we are in a low hiring environment, fires also remain low. Initial Jobless Claims, or those filing for unemployment benefits for the first time, remained around 199,000, which is very low. Employers are holding onto their workers because of the lack of immigration and baby boomers retiring…there is a lack of qualified labor supply out there.
Continuing Claims, or those staying on benefits and continuing to file after their initial claim, rose 24,000 to 1.8M. This figure has been pretty stable around these levels.
Turning to tomorrow’s BLS Jobs Report: The market is forecasting around 80,000 jobs to have been created in July, which is not a very strong number to begin with. But based on all of the other labor market data, logic and reason would point to a weaker than expected figure, which would give Bonds a boost and likely reduce rate hike odds. The Bond market needs some “bad medicine” from a weak Jobs Report.
While everything appears to be pointing to soft jobs data, we must remember that the BLS is quite unreliable, their figures are often overstated, and they are susceptible to huge revisions later. This makes the Jobs Report a very hard number to handicap.
The unemployment rate is expected to remain at 4.2%. While we have seen job losses within the Household Survey where the unemployment rate comes from, the labor force has also been shrinking, which has helped the unemployment rate to remain low.
Putting all the pieces together, we feel that tomorrow’s July BLS Jobs Report should be weak and the number of jobs created have a good chance of coming in around or beneath estimates. Additionally, we would not be surprised to see the unemployment rate rise to 4.3%.
Productivity and Unit Labor Costs
Inflation is one of the largest concerns right now, and while we know the majority of the inflation we are seeing right now is coming from temporary factors like oil disruptions, we are not seeing it come from the labor market.
Productivity in Q2 rose by 1.4%, which was much stronger than the 0.6% expected. Additionally, Q1 productivity was revised higher by 0.5%.
As a result of workers being more productive, unit labor costs rose by a softer than expected 1.3%. The market was expecting that figure to come in 0.8% higher. Q1 unit labor costs were revised lower by 0.5% as well.
Perhaps some of the increase in productivity and decline in costs is coming from AI, but nonetheless this is a deflationary report compared to previous readings.
Technical Analysis
Mortgage Bonds have tested resistance at the 25-day Moving Average for three days now, including this morning, but have not been able to maintain a break above it. Bonds do have nearby support at 101.39, but they are in a 20bp range. Momentum is on our side, but it will all come down to tomorrow’s BLS Jobs Report.
The 10-year is in a similar, but opposite position, being that it is measuring yields. Support at the 25-day Moving Average has been a tough level to break, and the next ceiling is all the way up at 4.71%. If Bonds can get some “bad medicine” from a weak BLS Jobs Report tomorrow, MBS will likely break above resistance and the 10-year under support.
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