UMBS were down in the first hour of trading.  The 6.0 coupon is down 19 bps and the 5.5 is down 30.

Bonds were already weaker overnight in a move led by stronger losses in Europe.  The AM econ data isn’t going to help the issue with Jobless Claims coming very close to breaking below 200k (lowest reading since mid- October).

ADP Employment = 164k vs 115k f’cast  [101k prev]

  • Leisure/Hospitality added 59,000.  Education/Health added 42,000.  Construction +24k

Jobless Claims = 202k vs 216k f’cast  [220k prev]

Continuing Claims = 1.881m vs 1.855 prev

Announced job cuts fell to 34,817 in December, according to outplacement firm Challenger, Gray and Christmas. “Layoffs have begun to level off, and hiring has remained steady as we end 2023. That said, labor costs are high. Employers are still extremely cautious and in cost-cutting mode heading into 2024, so the hiring process will likely slow for many job seekers and cuts will continue in Q1, though at a slower pace,

Overall stronger jobs data this morning has yields on the rise, but investors are still waiting for the unemployment report to be released Tomorrow.

The FOMC minutes indicated that the Fed isn’t quite yet worried about flagging economic growth. Their main focus continues to be inflation, not growth. That said, they do see it appropriate to move the Fed Funds rate lower towards the end of the year.

Participants judged that the current stance of monetary policy was restrictive and appeared to be restraining economic activity and inflation. In light of the policy restraint in place, along with more favorable data on inflation, participants generally viewed risks to inflation and employment as moving toward greater balance.

In terms of inflation, they generally view the supply chain issues to have been worked out. They see shelter inflation working its way lower as rents continue to weaken. Services inflation less shelter, which is largely driven by wage inflation is still elevated.

The Fed Funds futures have begun to take down the probability of a rate cut at the March FOMC meeting. A week ago, we were looking at a 86% chance of a rate cut, while we are now looking at 71% chance.

The gross US national debt surpassed $34T earlier this week for the first time, according to a Treasury Department announcement Tuesday, an increase of $1T since September and $14T since early 2020. The US currently adds roughly $5B to its debt each day, and recent estimates suggest the debt will reach $50T by 2033.

The federal government will pay roughly $800B to service its debt this year amid higher interest rates—equal to approximately 18% of 2023 federal revenues. Close to $8T of the total debt is intragovernmental—debt the government owes itself, the bulk of which comprises trust funds that pay out Social Security, Medicare, and others.

Thursday’s trading session provided an unpleasant but worthwhile reminder that “data dependence” cuts both ways in terms of its impact on the bond market.  Yesterday’s session saw weaker data help rates avoid a break above 4% while today’s data arguably did the opposite.  None of the above was a very big deal in the bigger picture, but Friday’s jobs report certainly has the power to change the tone if it falls far enough from forecast.

UMBS closed the day down 23 bps at 101.14 on the 6% coupon.  The 5.5 lost 31 bps.

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