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Mortgage Bonds are trading
slightly higher and have made a break above the important ceiling of resistance
at the 200-day Moving Average. A convincing break above this important
barrier would signal a major trend shift towards lower rates. It is highly
probable that the results of tomorrow's Jobs Report will be the deciding factor
whether Mortgage Bonds can make the break above the 200-day MA or if they will
be pushed back towards worse pricing. The Jobs report strategy below
lays out our thoughts.
Some good news on
Productivity is helping Bond prices this morning, as productivity for the second
quarter was revised higher to 4.3% from a previous reading of 2.2% and well
above expectations of 3.5%. Higher productivity is good news for the
economy and inflation as it shows employers are able to squeeze more output from
hours being worked. And if employers can produce more goods from their
existing workforce, without a need to hire or increase pay, it keeps wage-based
inflation down. Within the Productivity Report, Unit labor costs -- a key
inflation gauge - fell 0.5%, revised down from a gain of 1.3%, representing the
biggest decrease since the third quarter of 2007. Lower Unit Labor Costs
means less of a threat for wage-based inflation and this is good news for
Bonds.
Initial Jobless Claims came
in at 444,000, significantly higher than expectations of 420,000. And the
ADP Report showed a loss of 33,000 private sector jobs, pretty much in line with
expectations. After factoring in the usual 20,000 new government jobs
added to the economy, the ADP Report suggests tomorrow's official Jobs Report
will come in somewhere near -13,000. Expectations for
tomorrow's Non-farm payrolls is -75,000.
Jobs Report Strategy
We feel
tomorrow's Jobs Report will be soft, but muddied. The headline number may
come in better than the loss of 75,000 jobs that is expected, but other factors
may turn the report into a bullish one for Bonds. We are looking at the
Jobs number to come in around a 40k loss...that would normally be bad for bonds,
as it is better than expectations. And as we have discussed often, the
system for reporting includes a lot of estimates and averaging.
The "Birth
/ Death Ratio", which estimates the number of business created and dissolved,
primarily uses averages to determined the net for changes in the number
businesses operating. It then figures how many new jobs that would
create. While this is a guess at best system, the averaging factor really
can skew the numbers. The economy is in a sharp downtrend, so previous
averages will surely overstate the number of new jobs in the current
environment. We have seen this in both directions in the past. And
as the inevitable revisions occur, they wind up being yesterday's news,
especially since much of the revisions happen years later. That said, the
negative revisions we expect for the past two months should balance the scales
in market sentiment tomorrow, as they will likely offset the better than
expected headline. But we feel that the rate of unemployment, currently at
5.7%, may swell higher and strike fear into the minds of stock traders.
This should help bonds and may be enough to put pricing convincingly above the
200-day MA. Let's hope this happens, as it would start the flow of
refinances. So we suggest a floating position. |
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