STRONG JOB GROWTH IN JUNE PUSHING RATES HIGHER
It’s the first Friday of the month, and it is employment day. Always a volatile reaction, today no different; NFP jobs were expected +165K as released +224K, private jobs expected 149K increased 191K. The average job growth over the last three months is strong at 187K. Job gains today made ADP’s data on Wednesday (+102K) meaningless. The unemployment rate did increase to 3.7% from 3.6% expected. Average hourly earnings, however, were a little weaker than thought — +0.2% on estimates of 3.3% and yr/yr 3.1% against forecasts of 3.2%. The reaction sent the 10-yr from 1.94% before 8:30 am ET to 2.02% by 9:00 am, and MBS prices opened down 19 bps from Wednesday. Stock indexes were less volatile, with DJIA down 77 and S&P dropping 13. The dollar declined on the release and gold fell.
Prior to the report this morning there was increasing chatter that the Fed may lower rates by 50 bps at the end of the month instead of 25 bps as the Fed has been alluding to. For the moment that is off the table, but most believe the Fed will do 25 bps at the end of this month. The report today shows much stronger jobs, and that is an economic plus. But recent key economic reports have not been good compared to anticipated outlooks, that has led to that 50 bp rate hike. Jobs are there, but consumer spending is slowing while inflation still isn’t increasing as the Fed would like. One outstanding data point in today’s report was the increase in manufacturing jobs (that have been slowing) increased 17K on forecasts of 2K and 3K reported in May and 4K in April; Fed policymakers are watching manufacturing with concern. Payrolls at professional and business services jumped 51,000 as employers scramble to meet demand with contractors. Government payrolls, up 33,000, were also a large contributor to June’s growth.
While it’s looking good in the US, global data is still slowing. The Eurozone’s May Retail Sales dropped -0.3% m/m (expected +0.4%, last -0.1%) and +1.3% yr/yr (expected +1.6%, last +1.8%). Germany’s May Factory Orders -2.2% m/m (expected -0.1%, last +0.4%). Japan’s May Household Spending, however, was much better at +5.5% m/m (expected +1.2%, last -1.4%) and +4.0% yr/yr (expected +1.4%, last +1.3%).
On US-China trade; the talks aren’t going that well, and that should not be surprising. China says the U.S. needs to remove all tariffs on Chinese goods to get a trade deal done, according to Bloomberg. China won’t buy U.S. agricultural goods if U.S. “flip flops” again in future negotiations, according to South China Morning Post.
At 9:30 am the DJIA opened down -102, the NASDAQ dropped -40, and the S&P decreased by -12. The 10-yr note rate stood at 2.03%, +8 bp from Wednesday. MBS prices dropped -28 bps from Wednesday, and -17 bps from 9:30 Wednesday.
No more data is scheduled for today. Today is a day to rethink a lot of the assumptions that had tilted toward economic slowing and the increased idea the Fed would cut rates by 50 bps at the end of the month. The 10-yr note yield dropped to 1.95% on Wednesday and 1.98% on Tuesday. Technically that was a strong move, breaking the 2.00% resistance and holding it for two sessions, it went out the window this morning; the 10 now trading above its 20-day average and testing its 40-day average.