UMBs were Flat again on the open.  3 flat days in a row have become rare.

Bonds had moderate ups and downs in the overnight session, but stayed in a broadly sideways range between 4.16 and 4.21 for the 10yr.  Heading into the ADP data, yields were around 4.19.  After the data, the initial move was barely noticeable despite an obvious volume pop .  Yields fell to 4.174 but have since given some of that improvement back, currently up 1.5bps on the day at 4.182

ADP Employment =   103k vs 130k f’cast   [113k prev]

ADP says more moderate hiring and wage growth in 2024

Interestingly, the leisure / hospitality sector which has been the big driver of job growth post-pandemic registered a loss of 7,000 jobs.

Nonfarm productivity was revised upward to 5.2% in the third quarter. The Employment cost index was revised downward to -1.2%.

Wage growth is decelerating, with job stayers reporting a 5.6% increase in pay, the slowest since September 2021. Job changers saw a 8.3% increase. Manufacturing employment fell, while trade/transportation/utilities and education saw the biggest increases.

Long story short, ADP was a non-event that did nothing to change the prevailing range or narrative.  Stock futures did advance as stock players saw this as a sign that the Federal Reserve is done with its aggressive hiking.  Friday’s monthly jobs report is currently forecast to show employers added some 187,000 jobs in November. The unemployment rate is seen holding at the highest level in nearly two years.

According to data released this morning, the U.S. trade deficit rose 5% to a three-month high and put it on track to be the lowest in three years. Higher deficits subtract from gross domestic product, which shows the output of economic activity of a specific country.

Yes, mortgage rates have come down, but maybe potential borrowers don’t know about it yet. They have come down versus Treasury yields, which is nice, and now value analysts are saying that agency mortgage-backed securities are a good value in this market, and may be improving further. Spreads to the 10-year T-note are still wide: Today the 6% UMBS is yielding around 5.85-5.9 percent, which is 165 basis points over the 10-Year Treasury. A glance at rate sheets shows that origination rates are about 7.1 percent, which is still 290 basis points over the 10-year.

When that spread, which blew out in part from the March bank problems that never spread, will start to come in? It peaked at around 310 basis points a few months ago. Many expect to see continued improvement, perhaps down to 250 basis points in the first quarter as demand for MBS outpaces the supply. Mortgage rates will never match Treasury rates, of course, due to prepayment and credit risk, neither of which impact U.S. Treasury yields.

The ECB is now pricing in 6 rate cuts next year, and the Fed Funds futures are pricing in 5 rate cuts. German industrial numbers missed big time this morning, and it looks like we are in a global slowdown.

The combination of friendly economic data, dovish comments from the Bank of Canada, and lower oil prices helped yields drift down to new 3-month lows this morning.  In less than a month and a half, that brings the size of the 10yr yield rally to nearly 90bps.  Is that too much, too soon?  The answer could depend on perspective.  It’s a big move in and of itself, but one could argue that bonds were brutally oversold heading into mid-October.  One reassuring piece of evidence is the extent to which yields have remained calm and sideways on each of the past two afternoons after rallying to new multi month lows. Either way, there’s no debate about the data dependent nature of the movement.  With that in mind, Friday’s jobs report remains critically important.

UMBS ended the day up 13 bps at 100.95.  The 5.5 and 5.0 improved a little more, though still below 100.

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