Good Morning. I took a day off from the MBS Commentary blog yesterday to revisit the events that have unfolded leading up to the last day of the Federal Reserve's Agency MBS Purchase Program....TODAY.
We have lots to discuss but first we must check in on the market....because it's FINALLY moving!
Those of you wondering if the bond market's recent unwillingness to test the waters of a rebound rally has been a function of a "sell the rumor, buy the news" position ahead of the all-important Employment Situation Report (to be released Friday morning).....you might be right! At 8:15 this morning we got what has been an increasingly accurate sneak peak of Friday's NFP print...the ADP Employment Report.
The market was expecting private payrolls to grow by 40,000 jobs in March. CONSENSUS ESTIMATES WERE WAY OFF!
From the release...
Nonfarm private employment decreased 23,000 from February to March on a seasonally adjusted basis. The estimated change of employment from January 2010 to February 2010 was revised down slightly, from a decline of 20,000 to a decline of 24,000.
Since employment as measured by the ADP Report was not restrained in February by the effects of inclement weather, today’s figure does not incorporate a weather-related rebound that could be present in this month’s BLS data.
Looking deeper into the data...goods producing businesses are still the weakest sector of the labor market, with small firms still being the biggest source of job losses. Small business owners make up the majority of labor demand in the US. These employers must be able to access credit to build inventories so they can utilize any liquidity they have to expand hiring. This is an essential part of the recovery process. Jobs put money in people's pockets, money that is eventually redistributed around the economy. There is a clog in the distribution of wealth!
On the bright side, small businesses are shedding jobs at a slower pace. Here are the last four declines in small business payrolls: -12k, -19k, -35k, -51k.
Also on the bright side, small, service providing employers are adding jobs!!!! America is no longer a goods producing based economy---it's service based. Expect this to continue in the years ahead as firms invest in technology to improve work flow efficiency. This technology reduces the need for HUMAN LABOR. If you are without a job, go back to school and learn a service-based trade!
Another quick observation...
In March, construction employment dropped 43,000. This was the smallest decline since July of 2008, but basically unchanged from the decline of 44,000 during February 2010. Employment in the financial services sector dropped 8,000.
Plain and Simple: JOBS DATA WAS MUCH WORSE THAN EXPECTED. If you didn't read the deeper analysis, go back and do it. It will benefit your perspective of economic reality.
This weak read on the labor market should help qualm trader concerns that the FOMC will be raising overnight borrowing costs (Fed Funds Rate) sooner than forecast....which in turn should help alleviate pressure on short-dated Treasuries and lower rate levels across the yield curve.
Following the release, the 3.625% coupon bearing 10 year TSY note is +0-09 at 98-12 yielding 3.824%. BACK INSIDE THE 3.57 to 3.85% range we've been watching in 2010.
"Rate sheet influential" MBS prices improved as well...but are off their highs of the day. Also, the secondary market current coupon did lag TSYs into the rally. This will be a normal occurrence once the Fed exits the TBA MBS market at 3pm today.
The FN 4.0 is +0-04 at 97-05 yielding 4.276% and the FN 4.5 is +0-03 at 100-12 yielding 4.462%. The secondary market current coupon is 4.453%. The current coupon yield is 2bps wider vs. the 10yr note at +62.5bps and unchanged vs. the 10yr swap.
The worse than expected jobs data would normally incite a bull steepening rally on the yield curve, however the belly of the curve is the best performer this morning.
This is not a big surprise given the fact that primary dealers had to carry the load at last week's TSY note auctions. I am hoping the 2 year note yield can break the 1.00% resistance level. Reduced "rate hike" fears will help lower yields across the curve and keep mortgage rates from skyrocketing.
There has been decent volume behind this "buy the rumor, sell the news" rally (ADP being the news)....this is a positive event in the process of returning to the 3.57 to 3.85% originator friendly rates range.
Rate sheets will be a bit better. Reprices for the better around 100-18. Reprices for the worse around 100-06.
LAST DAY OF FED MBS PURCHASE PROGRAM!!!!