UMBS are down 8 bps on the open.  S&P Futures are pretty much flat.

We’ve been anticipating this week of data for the past 3 weeks and it has been delivering on the promise of increased motivation for the bond market.  To make matters better, that motivation has been almost exclusively toward lower rates.  Today is the first day without any top tier econ data and coincidentally the first day without a decisive rally in bonds.  That said, there’s no decisive selling either.  It is shaping up to serve as a very logical day of consolidation ahead of tomorrow’s jobs report which in turn might not pack a normal punch with CPI coming up next Wednesday.

This morning’s only big ticket event was actually the European Central Bank (ECB) announcement, but it hasn’t produced a notable reaction–especially not in the US bond market.  The ECB cut rates for the first time since 2019, which was not only 100% expected, but almost 100% telegraphed by the ECB.

The service economy accelerated in May, according to the ISM Services Index. April contracted slightly, which broke a 15 month string of advances and is now looking more like an outlier than a change in trend.

Employers announced 63,816 job cuts in May, according to the Challenger, Gray and Christmas Job Cut Report. This is a 1.5% decrease from April. Job cuts remained flat in May as companies assess performance and make plans for Q3 and Q4. Meanwhile, hiring announcements are at their lowest levels in a decade.

Estimates of 24Q2 GDP growth are quickly sinking as more data becomes available. The Atlanta Fed is now expecting quarterly seasonally adjusted annualized growth of 1.8%, down from 4.2% in mid-May. Similarly, the NY Fed now also sees growth at 1.8%, down from 2.75% in late April, and the St. Louis Fed sees just 1.2% growth, down from 1.4% last week. Averaging all three gets to 1.6%, economic stall speed.

Stocks and bonds experienced a lull ahead of the US jobs report, crucial for the Federal Reserve’s future decisions. Equities hovered near all-time highs, with mixed market sentiment: 36% of investors anticipated a “risk-off” move, 33% expected “risk-on,” and 31% foresaw negligible or mixed reactions. Treasuries fluctuated while the euro strengthened due to the European Central Bank raising inflation forecasts following a rate cut. As Wall Street awaited the payroll data, jobless claims exceeded estimates, labor costs rose less than previously reported, and the trade deficit widened. The anticipated report suggests the US added 180,000 jobs in May with a steady unemployment rate.

The S&P 500 remained stable after its 25th record in 2024, with the US opening antitrust investigations into Microsoft and Nvidia over AI dominance. GameStop saw a boost as “Roaring Kitty” announced a YouTube live stream. US 10-year yields hovered around 4.28%, with expectations for Federal Reserve rate cuts in November and December. Investors remain divided, balancing between economic slowdown evidence and rate cut implications. A pre-payrolls survey showed varied investor strategies, with 33% planning to “sell strength” and 54% ready to “buy a dip.” Analysts anticipate that moderating growth could benefit stocks, but rate cut reasons—whether due to inflation slowdown or growth deceleration—will significantly impact corporate earnings.

Although bonds continued to improve yesterday, the pace of gains has progressively slowed throughout the week.  Our base case was for that momentum to shift sideways or pull back a bit today and that’s exactly what we’ve seen.  It was the base case because it would be a logical move for a market that is leaning in a bullish direction as it waits for the data with the power to endorse or reject the bullish lead-off.  5 straight days of gains (plus a counterintuitive rally following ISM Services) was plenty.  Today’s relatively flat performance is actually just another indication of latent optimism for friendlier data in the future.  As for the “big show,” it remains to be seen how much of the spotlight goes to Friday’s jobs report with next week’s CPI continuing to be at the top of the marquee.

UMBS ended the day down 3 bps at 100.69

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