October 7th, 2011 10:08 AM by Lehel S.
The bond and mortgage markets prior to 8:30 were already weak and breaking key near term technical levels. The Sept employment report added to the selling with much better data than was expected. Non-farm jobs increased 103K, 40K more than what was expected, non-farm private jobs +137K, 50K more than expected. Adding to the improvement, August and July jobs were revised higher by a total of 99K more jobs than originally reported. The unemployment rate was unchanged at 9.1%. One area of weakness was in factory jobs; factory payrolls declined 13,000 in September, the biggest decrease since August 2010, after a 4,000 decline in August. Average hourly earnings rose 0.2% to $23.12. The average work week for all workers climbed six minutes to 34.3 hours.
The initial knee jerk reaction sent the 10 yr yield to 2.11% +12 bp frm yesterday's close, by 9:00 though the 10 settled at 2.08% with mortgage prices at 9:00 very volatile swinging in .12 bp moves click to click, down 14/32 (.44 bp).
In Europe EU leaders are trying to devise a comprehensive plan to rescue the region’s banksbefore a Group of 20 summit in November. There continues to be progress but at a speed that makes a snail a racer. The ECB also reintroduced yearlong loans, giving banks unlimited access to cash through January 2013. Lenders in the region may need as much as 200 billion euros ($269B) of additional capital, according to the International Monetary Fund. Global criticism is mounting and driving increased pessimism that a default in Greece will drag global economies into another much worse problem than in 2008 when Lehman failed. EU leaders are looking at the November G-20 summit in Cannes as a deadline to show they are in control of events.
By 9:30 rate markets had settled down from the volatile reaction to the better employment report. The DJIA opened +68, the 10 at 2.07% +8 bp and mortgage prices -10/32 (.31 bp). Not much gain in the stock indexes, the DJIA had already moved in anticipation of a better jobs report with the index up 314 points in the last two days.
At 10:00 August wholesale inventories. With employment this morning not much interest in the report. Inventories up +0.4% in line with expectations, sales were up 1.0%, sales in July revised to +0.3% frm unchanged; 1.16 months supply unchanged from July.
Later this afternoon at 3:00 August consumer credit is expected +$7B. We focus heavily on the data as a good measurement of consumer attitudes; borrowing is significant in understanding how consumers are actually acting versus much of the other consumer measurements. Revolving credit (credit cards) is what we want to see.
Technically; as we have noted previously, the 10 yr note has to hold at 2.04% on a closing basis in order to keep the bullish bias. This morning the 10 yr is at 2.06% at 10:00, earlier on the knee jerk it hit 2.11%. A close today over 2.04% on the 10 will close above its 20 and 40 day averages, there have been only seven sessions since early April the 10 has traded above those averages. The MBS markets are also testing the same key averages. Momentum oscillators are also showing increased weakness. Unless the bond market can find support at these levels the outlook for rates will become increasingly negative. Twice now in the last two weeks the 10 has fallen to the 1.70% area, both times markets rejected that level and rates spiked back to levels we have this morning, a close over 2.04% on the note will set technicians looking at a bearish double bottom for US rates.