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MBS Highway Daily Updates 12/02/2022

Current position: Carefully Floating

Stocks and Mortgage Bonds are both sharply lower after the Jobs report came out stronger than expected.

November Jobs Report

The Bureau of Labor Statistics (BLS) reported that were 263,000 jobs created in November, which was stronger than expectations of 200,000. There were 23,000 negative revisions to September and October, which weakens today's report a bit, but the headline was certainly a beat.

Some of the job creation components don't make sense and are in stark contrast to the ADP report we received earlier in the week, which samples 25M payrolls. Specifically, today's report showed 14,000 jobs created in Manufacturing, while the ADP showed 100 jobs lost. And today's report showed there were 20,000 Construction jobs created vs 2,000 lost in ADP. I don't know how manufacturing, which is in a recession, and construction, which we know has been extremely slow, added jobs.

While this figure seemed strong, it's not what it seems. 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 138,000 job losses, as opposed to 263,000 jobs created in the headline. But the unemployment rate remained at 3.7%... even with the job losses. How? The lab force contracted by a greater amount, falling by 186,000. That means the unemployment rate remained the same for the wrong reasons, but if it were not for people exiting the labor force, it would have moved higher. The labor force participation rate continued to decline, dropping from 62.2% to 62.1%.

Average hourly earnings were up 0.6 % in November, which was double the estimates, and are up 5.1% year over year. Average weekly earnings, however, rose by 0.3% last month and are only up 3.9% 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 34.5 to 34.4. Hourly earnings are stickier, as it's easier to cut a worker's hours vs their hourly pay.

The Bond market is reacting to the headline job creation beat, as well as average hourly earnings being double expectations. This is truly not a strong report when looking at the household survey, which showed job losses for the second month in a row. We hope this report is digested throughout the day and the Bond market recovers.

We anticipate the upcoming Jobs Reports to be weaker, as we have heard from so many companies that are trimming their labor force, but it has just not yet been reflected in the numbers.

Manufacturing is in a Recession

Yesterday, the November ISM manufacturing Index fell into contraction at 49 vs 50.2 in October and below the estimate of 49.7. This is the first time this number has printed below 50 since May 2020 and signals contractions. New orders were weak and in contraction for the third month in a row, while Inventories jumped at the consumer level to the most since April 2020, which likely will lead to lower production and potentially lower prices.

The employment component fell 1.6 pts to below 50 at 48.4 and the Prices paid fell another 3.6 pts to 43, the least since May 2020, and a sign of deflationary pressures. Manufacturing is clearly in a recession.

Technical Analysis

Mortgage Bonds are giving back some of their gains from yesterday, but have recovered almost half of their earlier losses and are managing to remain above their 100 - day Moving Average, which is important.

The 10 - year Treasury yield is battling with overhead resistance at 3.57%, with the next ceiling at 3.67% if 3.57% doesn't hold. As mentioned above, today's report was a bit of an illusion and not as strong as the headline figure would lead you to believe. We hope that as it is digested throughout the day, Bonds continue to pare losses. Begin the day carefully floating


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