June 1st, 2011 7:57 AM by Lehel S.
A huge eye opener early this morning. At 8:15 ADP May private jobs report hit hard; the consensus estimate was for an increase of 175K jobs, the reality hit like a brick----job growth according to ADP was up just 38K. The extremely weak report has the boys and girls in the back rooms busily revising the BLS report on Friday. Small businesses (1 to 49 employees) added 27K, medium businesses (50 to 499) added 30K, large businesses (more than 499) cut 19K. The goods producing sector lost 10K while service producing added 48K. In the aftermath of the report the 10 yr note moved to 3.00% briefly and mortgage prices at 9:00 up 8/32 (.25 bp). The data adds additional confirmation that jobs are not being added, it was evident the Philly Fed, the Richmond Fed data in the last two weeks and yesterday's Chicago purchasing mgrs data. To the bulls out there the report was dismissed as all negative data is these days; guests on CNBC after the report acted as if they were in a coma and continue to talk up the economic recovery; takes a lot of guts to ignore reality. The ADP data and the BLS data have a strong history of deviation between the two, likely it will be the same this time around but the very weak employment numbers today will cause estimates for Friday's data to be revised lower; the estimate for Fridays private non-farm jobs prior to this morning was an increase of about 220K.
Earlier this morning the weekly MBA mortgage applications. Applications increased 1.1% from one week earlier. The Refinance Index increased 0.9% to its highest level since December 10, 2010. The seasonally adjusted Purchase Index increased 1.5% from one week earlier. The unadjusted Purchase Index increased 0.8% compared with the previous week and was 3.1% higher than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 5.2%. The four week moving average is up 1.2% for the seasonally adjusted Purchase Index, while this average is up 7.1% for the Refinance Index. The refinance share of mortgage activity increased to 66.8% of total applications from 66.7% the previous week. This is the highest refinance share since January 28, 2011. The adjustable-rate mortgage (ARM) share of activity decreased to 5.8% from 6.3% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.69% from 4.60%, with points decreasing to 0.69 from 0.93 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.78% from 3.75%, with points decreasing to 1.04 from 1.22 (including the origination fee) for 80% loans.
Yesterday the House, as expected, voted not to increase the US debt limit. No excitement as it was a planed vote to demonstrate politicians do not want an increase in the debt unless there are solid spending cuts included. The Obama administration and most Dems are at odds with Reps on spending cuts. Democrats and the Administration want cuts on existing spending more a cap on further increases, while Republicans are pushing for outright cuts to many existing spending programs.
With two more economic reports hitting at 10:00, at 9:30 the DJIA opened down just 43 after rallying 128 yesterday. The equity markets taking the ADP jobs report with some grain of salt, it was so low that investors still hold out for a much better jobs report on Friday. At 9:30 the 10 yr note yield at 3.00%, mortgage prices +10/32 (.31 bp).
At 10:00 the national ISM manufacturing index, expected at 57.6, was much lower at 53.4 frm 60.4 in April, the lowest index since Sept 2009. All components weaker; employment 58.2 frm 62.7, new orders 51.0 frm 61.7 and prices pd 76.5 frm 85.5. As noted above the data adds confirmation the US economy is back-sliding. The initial reaction took the 10 yr note to 2.99% and mortgage prices +15/32 (.47 bp) on the day.
Also at 10:00 April construction spending expected -0.5% increased 0.4% but March construction was revised from +1.4% to +0.1%.
All economies are declining; India, S Korea, China, Europe and in the US. That said, there are spinners out already trying to push reality aside. The continuing weak economic data will now increase market thoughts that the Fed may have to do another QE; whether the Fed does or not it won't help much. The Fed has ruin out of bullets in our view. Markets though are lemming driven so any additional QE from the Fed will be seen as positive initially but in the long run it won't help.