Published Date 6/3/2022

May unemployment rate at 3.6% the same as in April but expected at 3.5%. Non-farm jobs increased 390K with estimates at 325K; and April revised to 436K from 428K; private jobs increased 333K with estimates of 310K. Yesterday after ADP reported private jobs were up just 128K traders were lowering the forecast for BLS private jobs, the immediate reaction to the stronger job growth pushed the 10 yr. note to 2.97% +6 bp and MBS prices down 27 bps. Employers added more than 400,000 jobs a month for 12 consecutive months, the longest period of such strong employment growth in records dating back to 1939. A survey of manufacturers also released two days ago found that employment in U.S. factories contracted slightly in May, snapping eight months of growth. But respondents indicated they still planned to expand their workforces, an indication that labor demand remains healthy.

The labor participation rate increased to 62.3% from 62.2%. The labor force participation rate, which measures the share of the population working or looking for work ticked up, a sign that plentiful jobs and higher wages are slowly drawing people back to work. Average hourly earnings expected +0.4% was +0.3%; yr./yr. earnings +5.2% down from 5.5% in April. Payrolls grew the most in leisure and hospitality in May, reflecting a shift in consumer demand from goods to services as pandemic restrictions fade. Professional, business services, transportation and warehousing businesses also posted solid gains. Looking past this report, more people are returning to work as wages increase, that should cool the rapidly increasing wage growth.

The report, stronger than forecasts sent stock indexes lower and increased the 10 yr. note to 2.98% +7 bps by 9 am, MBSs -22 bps.

At 9:30 am ET the DJIA opened -285, NASDAQ -213, S&P -50. 10 yr. at 9:30 am 2.97% +6 bp; FNMA 4.5 30 yr. coupon -20 bps and -4 bps from 9:30 am yesterday.

At 10 am May ISM non-manufacturing index, expected at 56.3 from 57.1 in April, as the index 55.9, the weakest since Jan 2020.

The markets have fully discounted 100 bps increase in the FF rate at present levels. We are now seeing, and hearing whispers increase that the Fed will have to go 200 bps by the end of the year to squelch inflation if that idea increases the 10 yr. note would increase 60 bps from present levels. Beside rate increases, the Fed began the process Wednesday of shrinking its $8.9 trillion asset portfolio. The Fed will allow up to $30B in Treasury’s and $17.5B in mortgage bonds to mature every month without investing the proceeds. In September, the Fed will allow twice as many securities—$60B in Treasury’s and $35B in mortgage bonds—to run off its portfolio. The central bank is shrinking its holdings passively, or by attrition, for the moment. A concern for the mortgage industry though is MBSs because of their long terms if the Fed decides down the line to actively sell MBSs it will add additional factors into the market. The Fed has made it clear that in the long run it no longer wants MBSs in its portfolio. The Fed it hasn’t ruled out sales of its $2.7 trillion in mortgage-backed securities at some point down the road this decade, because it will take a long time to shrink those holdings passively.

By 10 am the interest rate markets have settled down, the remainder of the day traders will focus on the movement in equity markets as a driver for interest rates.

Source: TBWS

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