Perfect Storm Leaves Rate Range Perfectly Intact

Coming into the week, yields were near the top of a narrow range (3.4-3.56 give or take).  With both ISM reports, the jobs report, and policy announcements from the Fed/ECB/BOE, it was a distinct possibility that we’d see that range broken.  By Thursday morning, that looked like it was a work in progress, but by the end of the day, yields were back to 3.40.  Then in a cruel twist of fate this morning, NFP beat forecasts by the widest margin in a year and half.  90 minutes later, ISM crushed its forecasts as well.  These events combined to push yields right up to the top of the range, leaving us to hurry up and wait for the next set of potential market movers.

Econ Data / Events

NFP

517k vs 185k f’cast, 260k prev

unemployment

3.4 vs 3.6 f’cast, 3.5 prev

earnings

0.3 vs 0.3 f’cast, 0.4 prev

ISM Non Manufacturing 

55.2 vs 50.4 f’cast, 49.2 prev

Market Movement Recap

09:29 AM Heavy selling after massive NFP number.  Perhaps finding footing now.  10yr yield up 11.2bps at 3.514.  MBS down 3/8ths of a point in 5.0 coupons, and half a point in 4.5s.

10:05 AM More losses after ISM data.  10yr up 15bps at 3.552.  MBS down 5/8ths of a point.

01:43 PM 10am marked the weakest levels and bonds have erased about half of the post-ISM losses.  MBS trading flat with 5.0 coupons down just under half a point.  10yr up 11.5bps on the day at 3.517.

Interest rates take cues from several places. Regularly scheduled economic data is always a consideration because a stronger economy implies more growth and tighter Fed policy, both of which are bad for rates. Certain reports carry significantly more weight than others.  If put to a vote, the perennial top dog would be The Employment Situation (aka “the jobs report”).  Over the years it is responsible for more volume and volatility in rates than any other data.  The most recent installment came out this morning and it was a doozy. The headline number of the jobs report is a tally of new job creation reported by employers: nonfarm payrolls (NFP).  That’s just a fancy name for “jobs.”  Today’s data reported the new jobs added in January, and there were quite a bit more than expected. NFP can be fairly volatile.  It’s not uncommon to see the number deviate from forecasts by more than 100k a few times a year.  Those big deviations usually result in big reactions in rates.  Forecasts called for just shy of 200k jobs.  Today’s actual NFP number came in at a staggering 517k, thus edging out March 2022 to stand as the biggest deviation since August 2021. To some extent, the massive gains may be attributed to a seasonal adjustment process that still struggles to understand new seasonal patterns that emerged after the pandemic.  But even if we forego seasonal adjustments, the economy added more than 400k jobs per month on average over the past 12 months and the employment rate has fallen to the lowest level since the 1960s. 

Fun with numbers! 1: the number of Chinese surveillance balloons over Montana. (That we know of.) Did you know that the last day of 2023 is 123123? (You heard it here first!) While we’re on random numbers, Atlanta has almost 25 thousand surveillance cameras, grabbing the honors as the most heavily surveilled city in the U.S. with 50 CCTV cameras for every 1,000 inhabitants. (“The research also suggests that there is little correlation between higher camera figures and lower crime indexes.”) Shifting to mortgage-related numbers, given the Fed news this week, overnight interest rates aren’t the same as 30-year mortgage rates, of course, but moves in interest rates impact a potential borrower’s ability to buy a home in a given price range. Here’s a handy-dandy chart for LOs to help borrowers to see how rates impact affordability. With generic rates in the 6’s for home loans, LOs are keenly interested in how that compares to, say, student loan rates. Federal student loans for undergraduates currently have an interest rate of 4.99 percent for the 2022-23 school year, while grad students have interest rates of 6.54 percent or 7.54 percent for unsubsidized loans or Direct PLUS loans, respectively. Private student loan interest rates range from 2 percent to 14 percent and are based primarily on one’s credit score. Keeping with the homeowner theme, today’s podcast can be found here and this week’s is sponsored by Milestones. Giving homeowners an all-inclusive homeownership experience including home value and equity monitoring, home maintenance reminders and how-to articles, cloud-based document storage, one-click access to hire professionals for various projects around the home, and much more.

While we may not have a great explanation or even the capacity to believe it, nonfarm payrolls came in at 517,000 this morning versus a median forecast of 185,000.  The bond market has reacted about like you’d expect: with a large, immediate sell-off.  While that number does indeed seem very high (and it is–especially relative to the forecast), there are two caveats.
1. It doesn’t look ridiculously high in the context of the past 2 years.  

2. Today’s data was also affected by the annual re-working of seasonal adjustment factors.  This isn’t some conspiracy or deception.  The BLS (the entity that collects and publishes this data) has an established procedure for updating seasonal adjustments once per year.  The changing landscape of the post-pandemic labor market has thrown a few curve balls to revision processes such as this.  And while we can’t comment on whether this particular revision caused overly optimistic distortion of today’s number, it’s fair to say it may have helped the number be a bit higher than it otherwise would have been.  
But before you cry foul and blame BLS math for overstating the level of employment, consider that the NON-ADJUSTED numbers suggest an average monthly job gain of more than 400k over the past year (same as the adjusted numbers).  
Adding insult to injury is a significantly stronger number reported in ISM’s non-manufacturing index 90 minutes after the jobs report. The index came in at 55.2 vs a median forecast of 50.4.  That is definitely a big “beat,” and an even bigger improvement from the 49.2 reported last month, but the caveat is much more obvious in this case.  Last month really sucked and economists incorrectly guessed that today’s number would follow suit.  Here too, changes in seasonal patterns are likely contributing to forecasting errors.

Given all of the above, the 11bp sell off in 10yr yields and the half point loss in MBS seem reasonable.  Both remain in stronger territory vs last week.