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MBS Highway - Daily Update 10/6/22

Current position: Locking Ahead of Tomorrow's Jobs Report

Stocks are vacillating between small gains and losses, while Mortgage Bonds are lower to start the day. After the 2M barrel per day cut by OPEC, the US decided to extend the use of the Strategic Petroleum Reserve for another month. The current inventory level is 416M barrels, which is the lowest since 1984.

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, increased by 29,000 to 219,000. Continuing Claims increased by 15,000 to 1.361M. Although the level of claims is still low, this was a significant increase. Additionally, it's unclear how much this figure was impacted by Hurricane lan... It may have been higher as many affected likely did not file claims.

We also saw the Challenger job cut data, which only shows the cuts and not the net based on hirings, showed that there was a 46% increase in cuts in September relative to August. September marks the fifth time this year that cuts were higher on a year over year basis. A senior VP there said,

"Some cracks are beginning to appear in the labor market. Hiring is slowing and downsizing events are beginning to occur."

KPMG Global released their CEO survey, which asked more than 1,300 CEOs at the world's largest businesses about their strategies and outlook. 86% anticipate a recession over the next 12 months. Regarding the labor market - The survey showed that 39 % of CEOs having already implemented a hiring freeze and 46% considering downsizing their workforce over the next 6 months.

Jobs Report Strategy

The market is expecting 250,000 job creations in the month of September and for the unemployment rate to remain at 3.7%. Average Hourly and Weekly earnings will also be in focus, as it can show wage pressured inflation. Here are a few things to consider

The bar is set low as far as expectations and the ADP report, although we don't know the correlation yet, showed 208,000 job creations, which was decent. The "sample week" of initial claims that encompasses the week of the 12th that gets factored into the BLS jobs data modeling was strong at 213,000. Additionally, when we look at the charts, Bonds are in a precarious position, trading in a very wide range between support and resistance. Although we highlighted some cracks in the labor market today, it may not show up in tomorrow's report - Remember that the Jobs Report is a lagging indicator.

Mortgage Bonds

Mortgage Bonds are lower and are trading in a very wide range between support at 97 and overhead resistance at 99.30... meaning there is a lot of room to the downside if there is a strong Jobs Report. Additionally, the 10 - year is starting to break above resistance, and if it's confirmed, there is room for yields to retest the highs around 4%. Because the risk/reward is skewed towards being cautious when looking at the charts, and we don't think the labor market weakness is going to show up in the numbers just yet, we believe it's prudent to be Locking ahead of tomorrow's Jobs Report.


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