Rates down and stocks up as jobs numbers miss the mark

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Published Date 6/7/2019

Prior to 8:30 am ET the 10 yr note yield was down 2 bps from yesterday at 2.10%. MBS prices were up +6 bps from yesterday's close; stock indexes were slightly better.

At 8:30 am ET BLS reported May employment data , and in a sense, it is not surprising; the data usually causes increased volatility. Today was another huge miss by economists on forecasts and most other analysts. The unemployment rate of 3.6% was better than the 3.7% expected. Jobs confirmed what ADP reported on Wednesday (+27K); non-farm payrolls generally expected around 160K to 180K were up 75K, and April jobs were revised down by 39K to 224K. Private jobs expected about 175K increased 90K and April jobs were revised lower by 31K to 205K. Manufacturing jobs remain soft, +3K on forecasts of 5K; Construction payrolls rose only 4,000 which contrasts sharply with 30,000 and 15,000 gains in the prior two months while government payrolls, after April's 19,000 jump, fell 15,000 in today's report. Retail, where traditional stores keep closing, extended its long stretch of declines with an 8,000 payroll contraction. Yet professional business services continue to post increases, up a solid 33,000 to suggest that businesses, trying to meet demand and having difficulty finding the right people, are turning to contractors to fill slots. Average hourly earnings were thought to be +0.3%, as reported +0.2%; yr/yr expected 3.2% as reported +33.1%. The labor participation rate remained unchanged at 62.8%. The pool of available workers is low and holding steady at 10.9 million.

The soft data is sending interest rates lower. At 9:00 am the 10-yr note was at 2.07%, down -5 bps and sitting right on the recent low set a week ago. MBS prices jumped 25 bps from yesterday by 9:00 am. The bigger movement is at the middle and lower end of the curve; 5 yr note yield 10 bps lower than yesterday (1.80%), 2 yr note 1.79% -11 bps from yesterday.

The data this morning adds more sentiment that the Fed will lower interest rates, possibly at the June meeting. The economy has been losing momentum, and now it may be spreading to the employment sector based on the lack of job growth from both ADP and now the BLS. Recent remarks from Jerome Powell and a number of other Fed officials have been tilting toward concerns that growth is slowing more than what the Fed had believed; global economies are contracting (China growth forecast to decline from 6.9% estimates in January was revised down to 6.5%); its growth has declined from 15% GDP over the last three years. Yesterday the ECB talked about lowering rates; a month ago it was talking about increasing rates and unwinding bond buying.

The May data was compiled before the Mexican tariffs and before the recent cooling between the US and China. The economy thus far has been largely resilient to the trade war with China. In early May, President Trump slapped additional tariffs of up to 25% on $200B of Chinese goods, which prompted retaliation by Beijing. Last week, he would impose a tariff on all goods from Mexico in a bid to stem the tide of migrants across the U.S.-Mexican border. Talks are ongoing to prevent the duties from kicking in at 5% next Monday. We expect those tariffs will be delayed. Reports on talks indicate Mexico seems willing to step its border enforcement at its southern border and clamp down on drugs moving into the US; markets should know more by the end of the day.

At 9:30 am the DJIA opened up +84, the NASDAQ added +32, and the S&P increased by +11. The 10-yr stood at 2.07% down -5 bps from yesterday.

At 10:00 am April wholesale inventories that were expected to add +0.3% increased by 0.8%. Wholesale trade measures the dollar value of sales made and inventories held by merchant wholesalers. It is a component of business sales and inventories.

The G-20 meeting of finance ministers and central bank governors will take place this weekend in Fukuoka, Japan. Bundesbank lowered its forecast for Germany's 2019 GDP growth to 0.6% from 1.6% while the 2020 forecast was cut to 1.2% from 1.6%. Bundesbank continues expecting 2019 inflation at 1.4% while inflation in 2020 is expected at 1.5%, down from the previous forecast for an increase of 1.8%. Germany's April Industrial Production decreased 1.9% m/m (expected -0.4%; April0.5%).

Stocks are seeing the weakness in employment data this morning as a buying opportunity believing the data will trigger the Fed to lower rates on June 19th at the FOMC meeting. MBS prices volatile so far this morning; Fannie 3.5 coupon jumped 25 bps on the 8:30 am ET data, at 9:30 +20 bps.

Source: TBWS

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