MBS MID-DAY: Big Bond Rally After Terrible NFP. Now Trying to Hold Gains


If you haven’t heard by now, today’s main event–Nonfarm Payrolls, or officially, ‘The Employment Situation’–was significantly weaker than expected.  It wasn’t the sort of NFP that can be explained away with the counterpoints that are occasionally used to make a bad report seem ‘not so bad.’   It was unequivocally bad.  I explained why in an update on MBS Live this morning.  Here’s the run-down if you didn’t catch it:

  • There are no positive revisions.  In fact, there are hefty negative revisions, -37k last month and 22k the month before.  (All this on top of the 31k headline drop from 173k to 142k.  That’s a total swing of 90k jobs.)
  • Private Payrolls (which are arguably just as relevant as nonfarm payrolls) paint an even worse picture, falling to 118k vs a 195k consensus.  Negative revisions were even bigger, with the previous month falling to 100k vs 140k
  • The participation rate decreased to 62.4 from 62.6.  Normally, a falling participation rate is used by econo-bears to explain why the jobless rate is falling faster than the headline suggests. Yet the jobless rate didn’t even fall this time!  It held steady at 5.1 vs 5.1.  This suggests that ‘all things being equal,’ unemployment increased faster than job growth.
  • When payrolls fall and unemployment rises, econo-bulls frequently point to things like increased hours or wages to help offset the headline damage.  This time around, Average hourly earnings came in at +0.0 vs +0.2 forecast.  There goes that argument.
  • But how about hours worked?  Sure, maybe people are making less money and sure, maybe there are fewer people working than would like to be, but maybe those who ARE working are getting more hours.  Nope! Avg workweek fell to 34.5 vs 34.6 previously/forecast.  The weekly hours index for private payrolls fell 0.2 pct after rising 0.1 pct last time.

Unsurprisingly, bond markets are significantly stronger.  10yr yields are down nearly 10bps and Fannie 3.0s are up 19/32nds at 102-03.  The initial run took 10yr yields another 4bps lower than current levels, and we’re now trying to hold a majority of the gains.  It doesn’t look like 10’s are too keen to break break the August ‘flash rally’ lows of 1.905%.  In fact, today’s rally stalled out at 1.904, which now seems like much more than a coincidence. 

The important support levels to watch heading into the afternoon are 1.958 in 10yr yields and 102-01 in Fannie 3.0 MBS.  101-30 would significantly increase negative reprice risk.  MBS Live members can always add a one-time price target notification for both of those levels.

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