July 7th, 2011 9:38 AM by Lehel S.
Two early employment reports this morning; at 8:15 ADP non-farm private jobs were expected at +65K to +90K, as reported jobs increased by 157K. The reaction sent interest rates up and prices lower in treasuries and mortgages. At 8:30 weekly jobless claims were expected down 8K, as reported down 14K to 418K; last week's claims were revised slightly higher to 432K frm 428K. Continuing claims fell to 3.68 mil frm last week's revised 3.725 mil; the 4 wk average 424.75K. Weekly claims have held above the 400K level now for 13 consecutive weeks.
The ADP report, much higher than was expected, initially sent the 10 yr note rate up to 3.16% from 3.11% yesterday and mortgage prices dropped 11/32 (.34 bp). Cooler heads prevailed however, within 30 minutes while still weaker the 10 yr bounced back some and mortgage prices at 8:45 off 6/32 (.18 bp). The increase in ADP set up a stronger open in the stock market, at 9:00 the DJIA was trading +60 points.
As widely expected the ECB did increase its base rate by 0.25%, the increase didn't have much of an impact on Europe's markets however.
Nothing left on the schedule today, the rest of the day will be positioning moves for tomorrow's more important BLS June employment report. There is little reason to expect any improvement in the bond and mortgage markets through the rest of the day given the ADP jobs report this morning and tomorrow's "official" June employment data. The estimates prior to the ADP report were for non-farm private jobs to have increased 125K with unemployment at 9.1% unchanged from May. After ADP analysts and traders now looking for a stronger jobs increase. ADP estimates in the past have deviated substantially at times from the BLS data so markets are left as always, holding collective breaths and will resist any improvement in the rate markets today.
The DJIA opened +69 at 9:30, the 10 yr note -12/32 to 3.15% +4 bp and mortgage prices -7/32 (.22 bp).
The debt ceiling debates between the Democrats and the Administration and Republicans appears to be making progress. There will be no debt defaults or any government shutdown. In these times neither party can afford to fumble the ball now. Unlikely a complete agreement will be reached for another couple of weeks but in the end it will get done. Neither side will be pleased and the debate will continue on how to cut spending, increase taxes and restructure social security and Medicare. Unlikely there will anything definitive until after 2012 elections as our politicians are more about being re-elected than facing serious issues.
Technically the bond and mortgage markets are bearish now, the only hope for a significant rebound in the near term is a weaker than expected employment report tomorrow. While we are not constructive on the short term outlook for interest rates, we don't believe rates will explode much higher. The 10 yr note is likely to move to 3.25% up 10 more basis points in rate and mortgages up an additional amount.