August 6th, 2011 8:20 AM by Lehel S.
At 8:30 the BLS employment report; always a surprise and today no different. The unemployment rate was expected at 9.2%, as reported 9.1%. Non-farm jobs expected up 86K increased 117K; private jobs expected +100K increased 154K. The average hourly earnings up 0.4%, much stronger than expected. Revisions to May and June non-farm jobs; increased to 53K frm 25K in May, June to +46K frm +18K. Factory jobs in July increased 24K, factory jobs in June revised to +11K frm +6K.
Markets were extremely volatile on the knee jerk reaction to the better jobs report. The 10 yr note jumped to 2.52% frm 2.42% at yesterday's close; mortgage prices fell 25/32 (.78 bp). The DJIA futures index jumped 150 points. It was however short-lived and markets settled somewhat by 9:00, by 9:30 however the 10 yr was back to 2.52% and mtgs -22/32 (.69 bp).
The DJIA opened +140, NASDAQ +30, S&P +14; 10 yr note 2.52% +10 bp and mortgage prices -23/32 (.72 bp). (see below for 10:00 levels)
Markets were on the edge of even more damage today had the employment report been soft, that it wasn't will help settle things down today. We don't however, believe the report will radically change the sentiment that the economy is slowing, but it should at least take us back from the cliff of more panic selling that we had yesterday. Yesterday hot money stampeded to US bond markets in search of liquidity and a hedge against the crashing stock market. The action yesterday in the equity markets did a lot of technical damage to the key stock indexes, even a little better market today will not likely be strong enough to overcome the damage. The bond market is very overbought technically and is overdue for some retracement, we can expect that the next few days the rate markets will settle and prices will decline. The bullish bias how ever will remain in tact; it would take the 10 yr to climb back above 2.85% to change our outlook to negative.
Part of the heavy selling yesterday was motivated by events out of Europe, that situation is still out there. The banking system in Europe continues to deteriorate, as it does the economy in Europe will slow just as it is doing here. The ECB yesterday announced it would provide loans to euro banks for six months with repurchase agreements , a needed move as the banks are running out of liquidity and eventually will have to take huge hits from Greece, Spain, Italy, Portugal and Ireland. Europe's economy is slowing more rapidly than in the US. Although the US employment report will slightly improve the economic outlook, the problems in Europe will continue to weigh on US markets.
Although the employment data wasn't as weak as thought, the US economy is still soft and our outlook hasn't changed. Growth will continue to slow with only fractional growth. The report this morning was better than thought but it is still confirming jobs are not increasing much and unemployment remains high. Small businesses still face uncertain health care costs and inability to borrow; consumers will continue the deleveraging that has been occurring for two years, home prices still falling----nothing has changed from yesterday except momentary relief that employment wasn't as bad as thought in July, the data confirms a very slow improvement in jobs, almost meaningless. The bond and mortgage markets will remain positive and rates are likely to continue lower but with less pace and and increase in two way trading. After a better open the stock market has already rolled over.