Last Thursday’s June employment report headlines were very good, +288K jobs, the unemployment rate 6.1% down 0.2%. The guts of the report however, while not bad, were not good. The labor participation rate at 62%, the U-6 indicated about 24% of those with part-time jobs wanted full time jobs. The reaction as you know sent the 10 yr note rate to 2.69% Thursday morning and ended Thursday at 2.63% up just 1 bp frm Wednesday’s close. Yesterday the 10 fell 2 bps and this morning at 9:00 at 2.58% 4 bps points lower than prior to employment data. We noted yesterday this week is absent of data allowing traders and investors to digest the employment data; the digestion appears to suggest employment may not be as firm as original takes. Adding more perspective; last Thursday after employment the DJIA increased 92 points; at 10:00 this morning the DJIA is down 122 points frm the close last Thursday.
US stock indexes were lower early this morning; in Europe the stock markets continue to sell off. Stock markets in Europe look shaky and may experience a major correction, if that were to happen it would increase the correction outlook here in the US that has gained more attention in the last few weeks. Why do we worry about the equity markets? Because if (when) the equity markets decline the bond and mortgage markets will benefit in terms of price improvements. This year there have been numerous times when the stock and bond markets moved in the same direction (stocks up, bond rates up; stocks down rates down), that will not occur again if equity markets come under sustained pressure.
Today begins the long earnings season with Alcoa reporting after the markets close this afternoon; (Alcoa always starts earnings season). There won’t be lot of earnings this week, I think only four companies report. The majority of earnings floods the market on July 21st week. About everything I have read recently from those who specialize in the equity markets has been positive with the majority expecting better earnings to be reported. It is therefore curious that the key stock indexes were weaker yesterday and starting very soft this morning. At 9:30 the DJIA opened -50, NASDAQ -9, S&P -5; the 10 yr note yield at 9:30 2.58% down 4 bps points and 30 yr MBS price +11 bps. (see below for 10:00 levels).
The only significant data to be reported at 3:00 pm, May consumer credit, expected down to +$17.5B frm April’s +$26.8B. The report generally doesn’t get a lot of attention, at least outwardly, but it is a key measurement of what consumers’ spending patterns are doing. We pay most attention to revolving credit (credit cards) to see whether consumers’ attitudes have firmed enough to begin using credit. The Conference Board’s monthly consumer confidence index and the U. of Michigan’s consumer sentiment index are helpful, but consumer use of credit is where the rubber meets the road.
Treasury will begin this week’s auctions this afternoon at 1:00 with $27B 3 yr note; not much of interest to long end of the curve though. Tomorrow $21B of 10s will be closely monitored as a measurement of demand for MBSs.
Europe’s stock markets continue to decline; in the US the same is happening after the markets were unable to sustain the marginal rally last week on the June employment report. Technically the 10 yr is back testing a key level at 2.56%. The 10 has fallen 12 bps in yield frm its highs Thursday morning after successfully holding its 100 day average. Currently the 10 is back below its 20 and 40 day averages this morning. A break below 2.55% on the note will set up a run to 2.50%. As noted, with earnings reports beginning we don’t expect the stock market will collapse in the long-awaited correction until there is a better look on Q2 earnings.