MBS up 23 bps in the morning. 3 winning mornings in a row. Stocks up 8.89 points
Challenger Job Cuts= 80.1k vs 92k f’cast
ADP Employment = 278k vs 200k f’cast [296k prev]
208k of the 278k job gains were in Leisure and Hospitality. Annual pay for job stayers is up 6.5% (6.7% prev) and job changers saw +12.1% (was 13.2%).
After a bit of weakness following the first round of data, the 2nd round is leading to a friendly reversal. A slight increase in jobless claims is a small benefit for bonds, but the big miss in labor costs is garnering even more attention.
3 fed speakers yesterday. Mester – ever the contrarian – wants to hike more. The 2 others indicated they are in favor of skipping a month next time to see more data and the impacts of things already done.
Philly Fed President Patrick Harker said the Fed “really should skip, not pause,” a rate hike at the June meeting. “I’m not saying that we’re not going to continue to tighten,” Harker said, citing sticky inflation, “but I think we can take a bit of a skip for a meeting” to assess how the aggressive tightening cycle that started in March 2022 has impacted the real economy. “The Fed doesn’t have to hike at every meeting.”
This comment caused a pretty dramatic shift in the Fed Funds futures, which now see a 75% chance of a pause in June after forecasting a 75% chance of a hike a few days ago.
If the Fed pauses in June, that should hopefully suck some volatility out of the bond market, which has been elevated since the Fed started tightening last year. The MOVE Index is sort of like a VIX for bonds shows how much volatility has increased
While bankruptcies were low in 2021 and very low in 2022, they are now meaningfully rising. Through April, U.S. bankruptcies, are at their highest level since 2010, and the immediate aftermath of the Great Recession. The rise is the inevitable result of higher interest rates, the failure of some regional banks, rising office building vacancy rates, progressively tighter lending conditions, increasingly skittish bond buyers, and a weak IPO market.
Reprice risk on the day is moderate, we could see some choppy trading that could trigger reprices, especially on the wholesale side. There is a lot of risk floating into tomorrow’s jobs data. Seem like odds are not in our favor
Yesterday’s economic data made for a bit of back and forth in the bond market with Fed speakers ultimately riding to the rescue by forwarding the notion of “skipping” a rate hike at the upcoming meeting. Today was a bit different with the AM econ data largely coming across in a bond-friendly manner. This was especially true of Q1 unit labor costs which missed estimates by a wide margin. Traders have increasingly moved on from debt ceiling headlines and are now turning their attention to Friday’s jobs report as casting the tie-breaking vote on whether this week’s events merit a return to the previous 3.4-3.6 range in 10yr yields.
MBS ended the day up 31 bps. 10 yr treasury down 3 bps at 3.61. Stocks gained 41