Mortgage Rates Lower With Big Miss In Jobs Data Expectations

Wow!  ADP delivered another surprise on job growth in May, as they reported a large increase in job growth versus the estimate (see yesterday morning’s report).  We have seen the deviation in job growth and forecasts is not reliable, but the volatility in the monthly employment data is so great that I am always fearful if I am advising my clients what to do, as I always play the side of caution when dealing with their largest monthly expense. Today, as if we needed another example, was another huge miss on May employment data - and this time it is in favor of the bond and mortgage markets and less favorable for the economic bullish bias. At 11:00AM, the 10yr yield is now back to the levels in late December at 2.15% while MBS are a positive 27BPS and heading higher.  This report completely refutes what ADP jobs reported yesterday (+253K).

The May unemployment rate did decline to 4.3% from 4.4%, the lowest level in 16 years, due to many people leaving the job market. The blow was non-farm job growth, expected +185K until yesterday, then revised higher on ADP report.  NFP jobs up just 138K, April revised down 37K from initially reported. Private jobs expected +172K, reported +147K and April revised lower by 21K from what was initially reported. The labor participation rate declined to 62.7% from 62.9%. Average hourly earnings expected +0.3% increased 0.2%; yr./yr. earnings +2.5%, unchanged from April.

Media and numerous economists are out with dire outlooks for the economy because of the US exit from the Paris Accord; talk of tariffs and other “sanctions” that media and economists are “convinced” the US economy will suffer as a result. Any meaningful sanctions are obviously highly unlikely. This is a global economy, and the US is the largest consumer of goods in the world, we lead in emission reductions, and the world will not step down hard on the US because it isn’t in any country’s interest to do so. We cannot ignore reality - the world relies on the US for defense and economic growth.

Now what will the Fed do in less than two weeks? Questions are increasing that maybe the Fed will have to pass on an increase (did I not say that before???). If the Fed does blink, investors in equities may have to re-think that the Fed is exceptionally concerned about the economic outlook. However, maybe the Fed should go ahead and do the deed and not put fear into the markets – I am torn on this notion.  Until now markets were almost 100% expecting an increase - backing off now would be perceived as the Fed waffling.

I do not believe that the market will make too much more of the improvements we have seen thus far today, even though the banks have again held back just a tad on the pricing.  I would float at this time and watch the 10yr to see where it goes the rest of the day – but if you are ready to close, lock these gains up and enjoy the weekend.