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MBS Highway Daily Updates 01/06/2023

Current position: Floating

Stocks and Mortgage Bonds are both sharply higher to start the day after the big BLS Jobs Report was released. While job creations were strong, there was a big drop in wage pressured inflation, which the Fed is focused on, and helped the markets to rally.

December Jobs Report

The Bureau of Labor Statistics (BLS) reported that there were 223,000 jobs created in December, which was stronger than expectations of 200,000. There were 28,000 negative revisions to October and November, which weakens today's report a bit, but the headline was in line after the revisions and pretty strong.

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 and includes a lot of modeling and estimations. The Household Survey is where the unemployment rate comes from and is derived from calling households to see if they are employed.

The Household Survey has its own job creation component, and it showed that there were 717,000 job creations, while the labor force increased by 439,000. This caused the unemployment rate to decline from a revised 3.6% to 3.5%. The labor force participation rate increased from 62.1% to 62.3%, the highest level since last August.

Looking deeper at the numbers: Of the 717,00 job creations in the household survey, 679,000 were from part-time workers, and only 38,000 were full-time. This could be a lot of holiday hires or people getting part-time work; 380,000 of the total were multiple job holders getting another job, much of which is likely part-time, to make ends meet.

Average hourly earnings were up 0.3% in December and are up 4.6% year over year, which is down from the previous report previously it was reported at 5.1% but revised lower to 4.8%. Average weekly earnings only rose by 0.2% last month and are only up 3.1% year over year. Average weekly earnings measures actual take-home pay because it adds in the component of how many hours were worked. And that fell on average from 34.4 to 34.3, which is the lowest level since 2020. While job gains were strong, the cut in hours would equate to a significant amount of jobs lost.

The Stock and Bond markets are reacting positively to the drop in wage growth, as this is what the Fed is focused on and means less wage pressured inflation.

Technical Analysis

Mortgage Bonds have broken above three levels of resistance and are now back at the 100.758 Fibonacci ceiling, which has been a difficult level to break above. The Stochastic momentum indicator has come into the zone and confirmed the positive stochastic crossover, which typically portends a continued rally higher. The 10 - year is down 10bp to 3.62%, trying to break beneath a triple floor of support. If it's able to, the next stop is 3.43%. Next week's CPI inflation report will be very important, and it's expected that core inflation will drop from 6% to 5.7-5.8%. If it comes in at 5.7% or 5.6%, we will likely see a very nice move higher in Bonds. Continue floating into the weekend.


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