If Bonds hold onto their gains, we will likely consider changing our MBS coupon that we focus on next week.
Stocks are moving sharply lower and Mortgage Bonds are rallying, following a much weaker than expected BLS Jobs Report. Stocks are now starting to view bad news as bad news because it’s recessionary.
BLS Jobs Report
The Bureau of Labor Statistics (BLS) reported that there were only 114,000 jobs created in July, which was well below estimates of 185,000. There were also 29,000 in negative revisions to the previous two months - Last month’s reading of 218,000 was revised lower to 216,000, and May was revised lower from 206,000 to 179,000. Remember, May will get revised once more and will likely be even lower.
The faulty Birth/Death model added 246,000 jobs to the headline figure – without it we would have seen job losses! This is where the BLS tries to figure out how many businesses came online vs offline and how many jobs that accounted for. The ADP report showed job losses in the small business sector.
Leisure and Hospitality only added 23,000 jobs and the majority of the gains came from Healthcare and Education, which added 57,000 jobs. Healthcare and Education accounted for almost 2/3 of the gains and came from sectors that are not sensitive to the economy. Those that are had much worse performance.
Average hourly earnings, which measures wage pressured inflation, rose 0.2%, which was lower than estimates of 0.3%. Year over year, average hourly earnings fell from 3.8% to 3.6%, which was below estimates of 3.7%.
Average weekly hours worked fell from 34.3 to 34.2. Average weekly earnings fell 0.1%, with the year over year figure decreasing from 3.5% to 3.3% year over year. Both of these show much lower wage pressured inflation.
Remember, there are two surveys within the Jobs report, the Business Survey and the Household Survey. The Business Survey is where the headline job creation number comes from the and the Household Survey is where the unemployment rate comes from.
The Household Survey has its own job creation component, and it showed only 67,000 job gains, which is even lower than the headline survey. Additionally, the labor force increased from 420,000…and the combination of the two made the unemployment rate jump from 4.1% to 4.3%...the highest level since October 2021.
The u-6 unemployment rate, which does not remove people that have not been looking for a job for more than four weeks, among other things, rose from 7.4% to 7.8% - Also the highest level since October 2021.
Furthermore, the SAHM rule is getting close to being triggered, which is a confirmation of a recession. The three month average of the unemployment rate is now 4.13%, which is 0.43% above the low over the last twelve months, which was 3.7% in November. Once this hits 0.5%, the rule is triggered. If the unemployment rate even falls to 4.2% next month, it will be triggered.
Looking deeper, those that worked part time for economic reasons rose 346,000 and those that could only find part-time work rose 51,000.
Truflation Inflation Data
Inflation has been moderating and at the last Fed meeting, Powell said they are gaining more confidence that it will hit their 2% goal, but they just want more of it. Today ’s labor data is going to force the Fed to cut regardless, but they would be at their inflation goal already if they used real-time data.
Truflation looks at 18M data points, as opposed to the roughly 80k within the CPI and PCE inflation reports. Trulfation is only showing year over year inflation at 1.5% vs 3% in CPI and 2.5% in PCE. The main reason for the big difference is shelter, which makes up 45% of core CPI and 18% of core PCE.
The shelter component in Truflation is 1.5%, while it’s 5.2% in CPI and 5.4% in PCE. If you were to use the Truflation figures in those reports, core CPI would be 1.6% and core PCE would be 1.9%...both below the Fed’s target. We know shelter is finally starting to catch up and this will help inflation come down, but it will take time.
The Fed is making the same mistake they made in 2021 but in reverse – They did not think inflation was a problem back then because it was being weighed down by the lagging shelter index, causing them to wait too long to hike rates. Now they are waiting too long to cut because shelter is overstating inflation.
Technical Analysis
Mortgage Bonds ran up as high as 101.975, testing the 100% Fibonacci level, but have given back some of their gains. They are still up roughly 30bp and are trying to remain above resistance at 101.76.The 10-year came as low as 3.80% this morning, almost hitting dead on the support level we have indicated at the 0% Fibonacci Retracement level. If yields can get under this floor, the next stop is around 3.60%. Our patience has been rewarded, but we want to make sure that as we go through the day, we don’t give up these gains. We will be keeping a tight leash on things and will change our position if we see things falter, because we want to make sure to capture this better pricing.
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