Before 8:30 this morning the DJIA index traded down another 117 points from yesterday’s close, the 10 year note rate at 2.59% +3 bp from yesterday’s close and MBS prices down 20 bps from yesterday. The July employment data was slightly weaker than forecasts, but generally speaking about what was thought. The reaction improved stock index trading and the 10 year note rate improved to unchanged and MBS prices went from -17 to +9 bps. We noted yesterday that market volatility will increase after the markets erupted yesterday.
July unemployment rate at 6.2% up from 6.1% in June (expectations were for 6.1%); non-farm jobs up 209K against estimates of 230K, private jobs +198K against estimates of 233K. Average hourly earnings up 0.1%, less than _+0.2% expected; the labor participating rate 62.9% from 62.8% in June. May and June non-farm jobs were revised up by a total of 15K more than originally reported. The report had something for everyone; not excessively strong, that took some of the pressure off stocks and bonds; not weak either, keeping the longer outlook questionable and uncertain. There will discussions all day, as was the case yesterday, whether the Fed will increase rates sooner than what has been thought. Construction companies added 22,000 workers and factory employment climbed 28,000 last month, led by a 14,600 gain in payrolls at auto plants that was the biggest since April 2013. Employment at private service providers increased 140,000 in July, the smallest gain in six months.
Yesterday a wave of stock and bond market selling on belief inflation is gaining and the economy is accelerating more rapidly than the Fed has been saying. In the policy statement from the FOMC meeting the group, following Yellen’s take, said there is significant underutilization in the labor markets. Today’s report does imply the Fed has it right; that will not change the deeper thinking that the Fed is behind in its plan to increase rates.
Also at 8:30 and buried by the employment report; June personal income and spending were reported, both were right at forecasts, up 0.4% for income and spending. The PCE also right on at +0.1%.
At 9:30 the DJIA opened -40, NASDAQ -4, S&P -4. 10 year note 2.54% -2 bps; 30 year MBS prices +22 bps.
9:55 U. of Michigan consumer sentiment index. Expected at 81.5 from 81.3 at mid-month was 81.8. At the end of June the index was at 82.5.
At 10:00 July ISM manufacturing index, forecasts were for the index at 56.0 from 55.3 in June; the index increased to 57.1. The internals were also better, the employment index increased as did the new orders component.
At 10:00 June construction spending was expected to have increased 0.5%, as reported spending fell 1.8%, May had a slight revision better, from +01% to +0.8%.
Ukraine/Russia; Ukraine said it had lost at least 10 of its troops in an ambush by pro-Russia separatists not far from where Malaysia Airlines Flight 17 crashed, as a team of investigators reached the site and were beginning work.
Israel/Hamas; a three day truce was agreed on, but nothing has changed, the fighting will resume in three days. Israel saying it will continue until all the tunnels are eradicated.
Portugal; worries over the financial health of a major Portuguese lender spooked global markets Thursday, drubbing shares in southern Europe and sending U.S. stocks on an early swoon.
Yesterday the 10 year note yield ran up to and held at its 100 day average before gaining some positive momentum as the stock market sold off 317 points on the DJIA. The US and global financial markets are entering a phase of increased volatility. Growing concerns that the Fed is losing its footing as the economy improves and inflation readings recently have increased. How long those ideas will be a factor isn’t easy to judge. There are still geopolitical issues that are being watched closely, another factor that is a day at a time concern. The markets now are going to react negatively on better than expected key economic measurements, and positively on weaker data. Market volatility will increase; already today a good example; MBS prices by 10:00 have already traded in a 45 bp price range; the DLIA 120 point range.
After all of today’s data was reported (except July auto sale that are dribbled out through the day). MBS prices have been volatile so far this morning, at 9:30 +22 bp, at 10:10 +11 bp, the 10 year note rate 2.55% -1 bp. Relax now, don’t try any front running either on the bullish or bearish idea. Let markets settle down. Our technicals are bearish presently; we never go against market price action and currently it is not good (not too bad either) but as long as the 10 trades above its 2 and 40 day averages on the rate we suggest keeping locked.