Current position: Carefully Floating
Stocks are lower and Mortgage Bonds are higher to start the day following this morning's ADP Employment Report.
Fed Skip or Pause?
Fed Governor and Vice Chair nominee, Jefferson, and Philly Fed President Harker both spoke yesterday indicating that they favored skipping a hike at the next Fed meeting. They noted that this skip will give the Fed more time to evaluate incoming data and evaluate whether additional policy firming is appropriate. Though Jefferson's nomination as vice chair is still pending in the senate, his comments are being taken as a cue about the June 14th meeting.
ADP Employment Report
ADP released their employment report, showing that there were 278,000 job creations in the month of May, which was far stronger than the 180,000 expected. Last month's figure of 296,000 was revised slightly lower to 291,000
Looking at the sectors, Leisure and Hospitality led the gains once again, adding 208,000 jobs. As we mentioned previously, those gains may be coming to an end soon - In April of 2019, there were 16.2M employees in the sector, and with today's report, there are now 16.5M...meaning we have eclipsed where we were in April pre-covid. There is likely not much more in the way of job gains from the sector that has been adding the most job creations each month. ADP also reported that annual pay for job stayers increased 6.5% year over year, down from 6.7% in the previous report. Job changers saw an average increase of 12.1%, down from 13.2%. While these figures are still high, they have been moderating and showing lower wage pressured inflation, which the Bond market liked.
The big BLS Jobs Report, which will get more attention, is tomorrow.
Initial Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, rose 2,000 to 232,000.
Removing some of the noise, the 4-week moving average continues to be around 230,000.
Continuing Claims, or those that continue to receive benefits after their initial claim, rose 6,000 to 1.795M. This metric remains around some of the highest levels we have seen in a long time and shows pretty clearly that hiring has slowed, as people are continuing to receive benefits and not find a new job
Jobs Report Strategy
The Jobs Report has been a tough one to handicap, as it has beaten estimates for most of the last year and has been running much hotter than ADP. But we feel that the risks favor a miss and that tomorrow's report will disappoint. We also believe that wage pressures may ease further, and that the unemployment rate will rise from 3.4% to 3.5%. This should be bond friendly.
Mortgage Bonds are continuing to battle the ceiling at 99.845. The positive stochastic crossover continues to form, which could portend higher MBS prices ahead.
The 10-year is moving lower and is just above a floor of support at its 200-day Moving Average. Just like MBS, the stochastics are pointing to lower yields. While the technicals are showing clear signs of a recovery, the BLS Jobs Report tomorrow will dictate the direction the market takes. Continue floating into tomorrow's Jobs Report.