Rates relatively flat on rock-solid jobs numbers

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Published Date 6/1/2018

Interest rates began increasing prior to 8:30 am EST. The 10-yr at 7:15 am bumped up +4 bps to 2.89%. Stock indexes in the futures markets were better, the DJIA adding +145.

At 8:30 am EST the May employment data was better than estimates. The unemployment rates are down to 3.8% from 3.9% the previous two months and hit their lowest level since April 2000. Non-farm jobs were thought to be +190K increased +223K, and private jobs expected +184K increased 218K. Manufacturing jobs added +18K, as expected. Average hourly earnings were up 0.3% against +0.2% forecast; yr/yr average hourly earnings +2.7% as expected and up from +2.6% in April. NFP jobs in April revised slightly lower, from +164K to +159K. The labor participation rate at 62.7% down from 62.8% in April, has declined the last three months. Always a debate among economists; some argue that the unemployment rate is overstating the strength of the jobs market.

Initial market reactions; the 10-yr yield at 9:00 2.92% was up +7 bps from 4:00 pm yesterday and 2 bps higher than early this morning. MBS prices at 9:00 am -19 bps from yesterday’s close. Stock indexes in futures markets, DJIA +182K.

The decline in the unemployment rate will ignite increased concerns about inflation in wages; the average hourly earnings increased 0.3%, better than 0.2% expected, but April average hourly earnings were up 0.1%. Wages appear to be increasing, although still not as rapidly as markets were expecting at the beginning of the year as tax cuts for businesses were widely believed to increase wages at a faster pace.

The on-again, off-again trade war fears increased. “Canada had pushed for an exemption from Trump’s tariffs -- thinking, now naively, there’d be a perk to being a neighbor, ally and largest buyer of U.S. goods. Trudeau had bitten his tongue through skirmishes over airplanes, lumber and North American Free Trade Agreement talks. Canadian Prime Minister Trudeau fired back with tariffs on U.S. exports of everything from whiskey to motorboats to orange juice. He said the legal basis of tariffs -- U.S. national security -- was an affront to Canadian soldiers who died fighting alongside Americans in numerous global battles.” (Bloomberg News)

Later today North Korea is set to deliver a letter to President Trump about the summit. Both sides sound optimistic about prospects for a meeting this month. It seems both leaders want this meeting to go forward (at least presently). The meeting, unless canceled, provides an opportunity for both countries; Trump wants to be the first president since the Korean War in the early ‘50s to meet a North Korean leader, and Kim wants to improve the poor condition of the Korean economy and join other improving global economies. The summit would be the first of a number of meetings. Nothing specific will likely happen apart from the pledge to continue talking.

Bloomberg is reporting today the U.S. has opened a criminal investigation into whether traders manipulated prices in the $550B market for corporate bonds issued by Fannie Mae and Freddie Mac. They are not looking into the mortgage securities issued by the two companies to finance home purchases, but rather at the secondary market for Fannie’s and Freddie’s corporate bonds. It’s unclear whether the investigation will lead to any prosecutions. The Justice Department has been examining possible manipulation of at least two other bond markets --including U.S. Treasuries -- for three years and has yet to bring any charges. This goes back to the mania in MBSs prior to the collapse in 2008. Prosecutors from the Justice Department’s antitrust division and criminal division are working on the investigation. The investigations are a follow-through from the Obama administration.

10:00 am revealed two data points: May ISM manufacturing index and April construction spending. The May ISM index, expected at 58.4 from 57.3, increased to 58.7. April construction spending increased a whopping 1.8%, the best month since Jan 2016; forecasts were +0.8%. Construction spending this year has generally been weaker that forecasts.

Source: TBWS

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