Wednesday – June 5, 2024

UMBS opened green, but turned Red in the first hour.  Now down 3 bps on UMBS

Bonds gave up a small amount of yesterday’s gains early in the overnight session, but got it right back during European hours.

ADP Employment = 152k vs 175k f’cast, 192k prev

“Job gains and pay growth are slowing going into the second half of the year,” said Nela Richardson, chief economist, ADP. “The labor market is solid, but we’re monitoring notable pockets of weakness tied to both producers and consumers.”

Manufacturing was particularly weak, which was confirmed in the ISM survey yesterday. Goods-producing job growth was basically flat, as gains in construction offset losses in manufacturing and natural resources.

Wage inflation continues to work its way downward, although the 5% increase we are seeing for job stayers is probably enough to keep inflation from falling to the Fed’s 2% target given that productivity growth has been running close to 0%.

ISM Services PMI = 53.8 vs 50.8 f’cast,     [49.4 prev]

ISM Employment = 47.1 vs 47.1 f’cast,    [45.9 prev]

ISM Prices = 58.1 vs 59.0 f’cast,          [59.2 prev]

ISM Biz Activity = 61.2 vs 53.0 f’cast,   [50.9 prev]

Job openings came in well below expectations, falling from a downwardly-revised 8.35 million to 8.06 million in April. A year ago, job openings were 9.9 million. The quits rate held steady at 2.2%.

We are starting to see movement in the Fed Funds futures, with the handicapping moving from 1 cut to 2 this year.

The bond market did not stick to its usual script today.  An important piece of economic data (ISM Services PMI) came out above the median forecast by an amount that is historically significant–an amount that would almost always result in immediate bond market weakness of at least several bps in terms of 10yr Treasury yields.  Unsurprisingly, that happened right away, but then something else happened.

Bonds quickly erased the losses and moved to the best levels of the day (where they stayed for the rest of the trading day). It’s a bit of a stretch to give credit to the components of the data, but it helps. Other explanations include anticipation for more palatable inflation data next week and, in the shorter-term, tame job creation in this Friday’s data.

UMBS closed the day up 14 bps at 100.72