Current Position: Floating Ahead of Tomorrow's Jobs Report
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Stocks are lower and mortgage bonds are slightly higher to start the day.
Initial Jobless Claims / Challenger Job Cuts
There was a big reworking of the Jobless Claims Report and their methodology of seasonal adjustments, changing their adjustments now that they have a better impact on how COVID has impacted the numbers. This was a material change from the previous reports over the past 5 years, making the numbers MUCH higher and more reflective of what we would have thought was happening in the labor market.
We were essentially getting fake numbers, which have now been corrected. We saw this in the January jobs report that was released in February as well, with all the seasonal adjustments and population controls, but now the picture is much clearer.
Initial Jobless Claims, which measure individuals filing for unemployment benefits for the first time, fell from 18,000 to 228,000, but that does not tell the whole picture. The previous week was revised higher by 48,000, from 198,000 to 246,000. Even with the drop, we are now seeing claims back above 200,000 and climbing quickly.
Removing some of the noise, the 4-week moving average is now near 240,000. That is the highest four-week average since January 2018 when removing COVID.
Continuing claims, or those that continue to receive benefits after their initial claim, rose 6,000 to 1.82 million, the highest reading since April 2018 when removing COVID.
Bottom line: This is a much different labor market picture because the numbers were wrongfully lower.
Challenger Job Cuts Report
The Challenger job cuts report for March showed that cuts rose 15% to 90,000 for a total of 270,000 this year, the highest quarter since Q3 2020. Year over year, job cuts are up almost 400%. The tech industry continues to lead the way, accounting for 38% of the cuts. The top reasons for job cuts so far this year are market/economic conditions, cost cutting, unit or department closings, and a demand downturn.
Jobs Report Strategy / Technical Analysis
The three main things the market will react to will be overall job creation, the unemployment rate, and wage pressures (inflation). We believe there is a good chance that the job creation number misses estimates, the unemployment rate ticks a bit higher, and wage pressures continue to decelerate. Here are some of the reasons why:
-The bar has been set high; job growth expectations are at 240,000, increasing the chances of a miss.
-ADP showed only 142,000 job creations in March, 65k lower than expectations.
-Wage gains in the ADP slowed, showing lower wage pressure on inflation.
-Job openings fell by more than 600,000 in March, to the lowest level in 21 months.
-Leisure and hospitality, the sector with the biggest job gains, is almost back to its pre-pandemic trend, and there may not be much left in the way of job gains in that sector.
-Job growth has beat estimates for the last 11 months and is due to come back to earth, especially now that the adjustments are behind us.
-We have seen a disconnect between ADP and the BLS Jobs Report. Over the last 3 months, ADP has shown about 100k fewer job creations each month. If these two reports still correlate well over time, one would expect the BLS to come in softer than the 240,000 job gains expected on Friday.
-Claims during the sample week were 246,000, which gets imputed into the BLS estimates and should add to a weaker jobs figure.
When looking at the charts, mortgage bonds continue to trade above their 200-day moving average and have room to move higher until reaching the next report, should we get a bond-friendly jobs report. The 10-year is down to 3.29%, the lowest yield since September last year. For all of the reasons mentioned, we believe the risks favor a weaker job number tomorrow, which will be Bond friendly. Float ahead of tomorrow's jobs report.
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