Current position: Carefully Floating
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Mortgage bonds and stocks are slightly higher to start the day. Fed Chair Jerome Powell will speak again today in front of the House. While his prepared testimony remains the same, the Q&A session could impact the markets.
The yield curve inverts further. Normally, longer-term yields like the 10-year yield are higher than shorter-term yields like the 2-year yield, but that has gone inverted. The 2-year yield is now 110bp higher than the 10-year yield, which is deeply inverted and has been a very reliable recession indicator.
The 2-year yield has been moving up after Powell's comments, as it is pricing in further rate hikes.
ADP Employment Report
ADP released their employment report, showing that there were 242,000 job creations in the month of February, which was stronger than the 200,000 expected. Additionally, January was revised higher by 13,000 from 106,000 to 219,000. Looking at the sectors, Leisure and Hospitality led the gains once again.
But those gains may be coming to an end soon. During COVID, there were roughly 10M Leisure and Hospitality jobs lost, and we have been adding around 100k each month during the recovery. But we are now close to getting back to the trend pre-pandemic, which means there may not be much more in the way of job gains from the sector that has been adding the most.
ADP also reported that annual pay for job stayers increased 7.2% year over year, down from 7.3% in the previous report. Job changers saw an average increase of 14.3%, down from 14.9%, but it's still down 1.1% from the originally reported number of 15.4% last month before the revision. The slowing of wage increases is helping bonds a bit this morning.
Mortgage Apps
The MBA released their mortgage application data for last week, showing that purchases rose 6.6% last week and are now down 44% year over year.
Interest rates increased from 6.75% to 6.79%, which is 3% higher than this time last year when rates were closer to 3.79%. Refinances rose 9.4% last week and are down 76% from this time last year.
By the way, about 90% of outstanding mortgages are under 5%, and 70% are below 4%.
10 year Auction
Later this afternoon at 1:00 pm ET, there will be a 10-year Treasury note auction. This can be important, as it could give us an indication of what bond traders are thinking—if they believe we will get a weak BLS Jobs Report on Friday, they will likely have strong demand for Treasury bonds at auction.
Technical Analysis
Mortgage bonds are continuing to battle with the 99.203 level, which is holding for now. There is about 20bp of room to the upside until reaching the next ceiling at 99.547. The 10-year is moving lower to 3.93% and has room to continue down until reaching 3.90%. We have to be on guard for surprises in Powell's Q&A session this morning, as well as the auction results shortly after 1:00 p.m. ET. Begin the day carefully floating.