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Wednesday, June 1, 2016

Mortgage Bond Market Analysis - Jobs Week

It's Jobs Week.  There is a lot of data to go over to get us back up to speed after me being off-line last week.  Manufacturing data has been (much) weaker than expected recently.  Yesterday the May Chicago PMI came in below expectations at 49.3 vs. estimates of 50.9.  To the contrary, this morning's May ISM Manufacturing report came in at 51.3 vs. expectations of 50.4.  The Prices Paid component jumped to 63.5 vs. estimates of 59.6; both numbers are hot, but the actual number is huge.  This is inflationary and it's the kind of thing that will feed fuel to the fire for those Fed members who want to raise rates at the June meeting.

April Construction Spending came in at -1.8% vs. estimates of +.6%.  A rather large discrepancy.  The May Consumer Confidence came in at 92.6 vs. estimates of 96 - another big miss.  There is a lot of data that still shows the economy is on shaky ground but there is also data that shows we are recovering, even if it is slower than most of us would like.  April Personal Income came in as expected at +.4% but Personal Spending came in at +1% vs. expectations of +.7% - this is a big surprise to the upside and gives more fuel to the "raise the Fed Funds rate" fire.  In spite of the surprise in Personal Spending, the Core PCE remained at 1.6% YOY which provides the "let's keep rates where they are" camp some water to put out the fire.

On May 27th, Janet Yellen said that the economy has picked up it's pace from the slow growth period of the 4th and 1st quarters.  She said that she expects the labor market to continue to tighten and the economy to grow at the rate it has been so far in the 2nd quarter.  She indicated that if this happens, the Fed will be ready to act in the coming months.  So what does this mean (the bond traders hate nebulous messages like this)?  Are they going to raise rates at the June FOMC meeting or not?  Time reveals all answers.

Due to the Memorial Day holiday, the ADP Private Payroll numbers will be released tomorrow with the Jobless Claims numbers instead of the normal Wednesday release.  Expectations are for 180K which is 21K better than last month's disappointing 159K reading.  Non-farm Payrolls, the Unemployment Rate, Factory Orders, ISM Non-manufacturing, and Average Hourly Earnings will be released on Friday.  We will also hear from Mario Draghi of the ECB tomorrow morning - I can't imagine too much good news from his comments as Europe continues to struggle but we could get a surprise.

The FNMA benchmark bond is up 1 basis point at 102.34.  It hit the two resistance levels of 102.45 and 102.53 this morning and got pushed back down.  The RSI is approaching overbought.  The first resistance level of 102.45 is also about what the 25 day moving average is so that makes it stronger.  I'm always cautious when it comes to Jobs week.  If you or a client has a loan that isn't locked, you may want to consider locking ahead of the data.  Make it a great day.

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