Update 6/4/10
Risks favor: Floating
Current Price of FNMA 4.5% Bond: $102.53, +47bp
The Jobs Report was a complete surprise, and a disappointment in general. It was far worse than most estimates, including ours, as we had felt that the risks were for a stronger Report. And as a result, Mortgage Bonds are trading higher – but we need to pay close attention, as prices are right near a strong resistance level.
The headline number in the Jobs Report showed 431,000 jobs created in May, quite a bit below the 500,000 that were expected. And of that 431,000, there were 411,000 temporary census workers hired…so this was not a good number. Private employment increased by just 41,000, quite a bit below Wall Street estimates and the weakest gain since January. There were no revisions to April’s reading, but March was revised to show 22,000 fewer jobs created, taking that number to 208,000 jobs created from the previously reported 230,000. And even the Household Survey – which had shown 1.1M jobs created over the past three months – showed a very poor number last month, of 35,000 jobs lost during May.
As we have often written to you about over the years, the Household Survey or Current Population Survey (CPS) may be a more accurate reading, because this is where actual households are contacted. Additionally, this is the survey that gives us the Unemployment Rate. The headline job creations number that you hear about in the media comes from the business or Establishment Report, also known as the Current Employment Statistics (CES). This report includes the “birth-death ratio”, which we have also written to you about and explained to you about for several years. It’s interesting to see how just lately, some of the media networks appear to have just caught on to how misleading the birth-death ratio can be.
Obviously the number was a disappointment, but there still were modest job creations. Additionally, average hours worked did improve, which is a good sign. And the Unemployment Rate did drop from 9.9% to 9.7%.
Even before the disappointing jobs news, the stage was set for lower Stock prices and higher Bond prices, with more troubling news out of Europe this morning. Hungary has stated that they are in a “very grave situation” as it relates to their economy. This constant negative turbulence out of Europe has pushed the Euro down towards $1.20 this morning. And once the jobs number came out, the Stock losses and Bond gains accelerated.
Next week the Treasury will auction off $70B in 3 and 10 Year Notes and 30-Year Bonds. It will be interesting to see how these auctions perform with yields at very low levels.
We will start the day by floating and watch how prices trade near resistance. Be mindful that the last couple of times the Bond was near these levels, it did retreat lower.