CHM Blog

Dec employment rate was thought to be 3.7% unchanged from Nov, as released unemployment declined to 3.5%. Non-farm jobs increased 233K against 200K expected; private jobs +220K better than 175K expected. Average hourly earnings estimates +0.4% m/m dropped to +0.3%, yr./yr. 4.6% with estimates at 5.0%. The labor participation rate at 62.3% from 62.2%. Wage inflation slowing, unemployment declining and jobs stronger than expected; the knee jerk reaction pushed the 10 yr. note down 2 bps and MBS prices 22 bps better from yesterday. Stock indexes increased, the DJIA +332 at 9 am ET.

One of the keys for the Fed recently has been the employment outlook that hasn’t slipped in the recent economic slowing, today’s data isn’t what the Fed wanted to see, lower unemployment but the decline in earnings does provide some relief that maybe wages are beginning to slow. Yesterday applications for jobless benefits fell to a three-month low, reinforcing the strength of the labor market. The slowing of wage increases sets thoughts that the Fed may not have to increase rates as much as markets were thinking. The Fed has been particularly concerned about wage pressures dampening its efforts to get to its inflation goal. The unemployment rate at 3.5% is the lowest going back to 1969.

At 9:30 am the DJIA opened +278, NASDAQ +47, S&P +27. 10 yr. note yield at 3.70% down 1 bp from yesterday. FNMA 5.5 30 yr. coupon at 9:30 am +16 bps from yesterday and +30 bps from 9:30 am yesterday.

At 10 am Dec ISM services sector index expected at 55.0 from 56.5; the index hit at 49.6, a contraction, employment 49.8 from 51.5, prices paid 67.6 from 70.0, new orders 45.2 from 56.0.

The data today adds more confirmation that the 10 yr. note will not increase much from now on. Inflation is the kiss of death for long term rates, the focus now at the short end with the Fed still poised to increase rates. The soft earnings in Dec helps but it will require more evidence before the Fed relents. The reaction to the Dec employment this morning is rather mute, the 10 down just 1 bps while the 2 yr. note -4 bps.

The 10 am ISM services data triggered a strong reaction in rates, after barely changed on employment data the 10 yr. note yield declined 8 bps and MBS prices increased 34 bps. Dec services, the stronger sector now in contraction lessening inflation concerns. The stock indexes did manage to hold their gains.

PRICES @ 10:10 AM

S&P 500: 3849 +41

Richard Sardella has been actively managing and providing services in the mortgage industry for over 30 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

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