Bonds Hold On to NFP-Driven Gains Despite Some Push-Back

Whether you view it as a perfectly logical reaction to NFP coming in at 175k vs 243k or a bit too much of a rally relative to the motivation, no one could argue that bond yields were destined to drop after seeing this morning’s jobs report.  But employment data is only worth so much these days.  The main event continues to be inflation and we were reminded of that with the 10am ISM Services data.  The ISM headline was actually rate friendly, but the inflation component was the bigger mover, and it was not friendly.  Bonds lost almost all of their post-NFP gains in response, but managed to level off in the PM hours.  Combined with the 2 previous days of green, the net effect is the best closing levels since April 9th.

Econ Data / Events

Nonfarm Payrolls

175k vs 243k f’cast, 315k prev

Unemployment Rate

3.9 vs 3.8 f’cast/prev

Wages

0.2 vs 0.3 f’cast, 0.3 prev

ISM Non Manufacturing

49.4 vs 52.0 f’cast, 51.4 prev

ISM Prices

59.2 vs 55.0 f’cast, 53.4 prev

Market Movement Recap

08:43 AM Modestly stronger overnight with additional gains after NFP data.  10yr down 8bps at 4.50, and MBS up 3/8ths

10:15 AM losing some ground after ISM.  MBS still up 11 ticks (.34) and 10yr down 5.3bps at 4.526

02:16 PM gradually bouncing back and now sideways in the middle of the post-NFP range.  MBS up 3/8ths.  10yr down 7.3bps at 4.507

04:49 PM Very flat since noon with MBS up 11 ticks (.34) and 10yr yields down 8bps at 4.499.

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On most months in modern economic memory, a gain of 175k payrolls would be welcome news for the labor market.  Depending on the context, it still is.  But in today’s case, it’s much lower than the market expected and not a high enough number to justify the 4.6+ 10yr yields seen yesterday.  Bonds rallied instantly when the news printed, but one rate-friendly jobs report is only a fine tuning adjustment to a rate environment dominated by inflation concerns.
Evidence of inflation concerns was available in real time today following the ISM Services data.  The headline was weaker, which would normally be good for bonds.  But the price component was quite a bit higher, which was enough for the bond market to react negatively.  

Despite the push-back, bonds remain in much stronger territory and have now mad solid gains 3 days in a row.  Yields are back in line with the afternoon of the last CPI day on April 10th.

Rocket Cos. reported an increase in gain-on-sale margin but warned that going forward it is likely to slip back to levels seen in the second half of last year.

Almost half of parents said their grown children returned to live with them after graduation, placing greater challenges on their own long-term housing and retirement goals, according to a recent survey.

The 2022 vintage had a higher percentage of purchase mortgages, as well as 30-year fixed-rate loans versus the 2021 production, an annual Federal Housing Finance Agency report said.

In total, 84 producers from mortgage lenders including Summit Funding and Movement Mortgage have transitioned to Fairway Independent Mortgage.

But the mortgage unit of Intercontinental Exchange narrowed its quarterly losses and touted the addition of several new customers this year in its earnings call.

The bond market–which dictates interest rates–had a generally favorable response to yesterday’s update from the Federal Reserve.  While the Fed didn’t cut rates, and while they’re increasingly acknowledging that rate cuts are moving farther into the future, they still think data will evolve in a way that results in the next move being a cut as opposed to a hike. Positive momentum continued today, in spite of several economic reports that argued the opposite case.  Had these reports been top tier market movers, the counterintuitive victory would have been highly unlikely. Friday is a different sort of day in terms of economic data.  The big monthly jobs report is in a league of its own when it comes to labor market data, and while it may not currently be the most important report on any given month, it’s a consistent 2nd place behind CPI.  After the jobs report, we’ll get a strong 2nd tier contender in the form of ISM’s service sector index.   These two reports have the power to accelerate or reverse the friendly tone seen in rates over the past 2 days.  As for today, the average lender inched just barely to the lowest levels since April 12th.  This wasn’t the case in the first half of the day, but as bonds improved, many lenders were able to issue mid-day reprices. 

Counterintuitive Rally And Asymmetric Risk

Bonds began the day in slightly stronger territory and managed to hold the gains after the early economic data which consisted of unfriendly readings in Challenger layoffs, Jobless Claims, and Q1 Unit Labor Costs.  All three spoke to ongoing labor market strength with the latter adding some inflationary fuel to the fire.  But the bond market is apparently tired of reacting to the alarming data from Q1 and March.  Instead, the perfect adherence to previously established technical levels (4.64 and 4.57 in terms of the 10yr) suggests intraday volatility was a factor of positioning and short-covering ahead of Friday’s jobs report.  There is some asymmetric risk potential on Friday considering how unfazed bonds seem to be by yet another unfriendly report (with the implication being a greater willingness to chase the bid on a downbeat jobs number). Just remember, the previous sentence tells us nothing about the direction of trading–only probable magnitude.

Econ Data / Events

Jobless Claims

208k vs 212k f’cast, 208k prev

Continued Claims

1774k vs 1800k f’cast, 1774k prev

Market Movement Recap

08:34 AM 10yr up from 4.592 overnight lows to 4.621 (still down 1.3bps on the day).  MBS are still up an eighth of a point, but down 2 ticks (.06) from the highs.

12:37 PM Some weakness into the 9am hour, but now at the best levels of the day.  10yr down 4bps at 4.593.  MBS up just over a quarter point.

03:18 PM Flat at best levels.  MBS up nearly 3/8ths and 10yr down 5.6bps at 4.578