It was supposed to be a nice morning in the pool, but then, of all things, a giant shark shows up and takes a bite out of the fun. Who would have guessed? A bumble bee I could see, but how did a shark get in this pool?
Sometimes the economic releases defy reason. Only 2 of the more than 70 firms polled for analysis on the payrolls figures actually predicted 20k cuts or below. The median was minus 75k and the average was minus 77k. To put things in perspective, 22 of the firms had forecast over a 100k cut, with the highest estimate being 150k loss. Here's the full chart.
So a loss of only 20k payrolls, though still indicating a contracting economy, is crushingly positive in the context of where we think the economy is heading. It's almost enough of a discrepancy to make you wonder if any Nixon-esque figures with black stalking caps, a flashlight, a grappling hook, some black face paint, and a giant eraser, were seen snooping around the grounds of Postal Square Building 2 (where the BLS resides). All conspiracy theories aside, this was a big deal.
It's a big deal for the broad economic outlook at this metric is "up there" with the most important and closely watched economic reports. The fact that we've seen some positive data in other reports, despite a weak consumer, combined with this much stronger than expected NFP showing, has more than a few economists, traders, and laypersons thinking: "maybe this will be the great ALMOST RECESSION of 2008..." Some of them are adopting the belief that this jumbo jet of economic destiny has pulled out of its nose dive and will now slowly begin to climb. As we know, that positivity bolsters an already rallying stock market and pulls money out of the fixed income market.
On that note, Treasuries are certainly the ugly sister this morning as MBS are glowing with radiance by comparison. The 10 year note (not mortgage related) is currently down 25/32nds, but the PAR coupon on MBS (5.5%) is only down a scant 8/32nds. This will only cost you .25 on today's rate sheets (possibly more if news develops between now and rates).
But Wait! This just in: Factory Orders report just came in stronger than expected including a revision from last months data stronger than expected. The consensus was for a reading of .3% and the actual number came in at 1.4% (this is only being reported verbally on Bloomberg as of now).
So far, MBS haven't reacted horribly to this, with the day's loss holding at around .25 or 8/32nds on the 5.5% coupon. Stocks shot up at the open, but have since pulled back. As they have done so, it has allowed room for MBS to improve, which as previously said, are obviously looking very attractive compared to treasuries. Now that we're over 13,000 in the Dow, even though we have positive economic data, even the market bulls agree that the gains will not simply continue. Given the broader economic context many feel the Dow is still overbought. This is great news for MBS who have tightened the Gap very nicely to to treasuries during that time (of course, days like today help that gap to tighten even further). The point is, when the Dow either "checks up" or flat out "turns tail and runs" back toward reality (my reality anyway, bah humbug), fixed income will improve. But now that the spread between treasuries and MBS have tightened, mortgage rates will be even lower for any given level of treasury pricing.
So if you were as bearish on the NFP as me (and the rest of the free world), you may have floated last night. The bad news is the .25-.375 rate worsening we'll see this morning. The good news is that MBS is fighting like an enraged badger, forcing the weaker treasuries (wombats perhaps?), to give up 3/32nds before MBS will give up 1. The other good news is that the lock/float recommendation for today is very clear: float.
As always, do stay tuned to this blog. Unlike other days this week, watching treasuries will be a horrible indicator of MBS today. We have a slow data week next week, which tends to put more emphasis on headlines. This will reward the floaters who maintain vigilance and are ready to lock at a moment's notice. So, it's back on with the water wings, and back into the pool! I'll let you know if I see any other sharks!