The March employment report on Friday was a lot better than what as expected sending the bond and mortgage market prices falling and yields up again. The total jobs increased less than what markets were thinking, up 162K against 200K, but the consensus was that job growth would come primarily from the hiring of census workers. That wasn't the case; census workers accounted for just 48K of the increase. Job growth came in the manufacturing and service sectors with manufacturing jobs up for the third month in a row. Add in revisions for Feb and Jan that added an addition of 40K more jobs to previous reports. While the stated unemployment rate was unchanged at 9.7%, the real unemployment rate when discouraged workers that have dropped out of looking are added is about 18% unemployed. Looking out for April and May, since census workers were not generated in March, the months coming will swell with part time census workers.
Selling on the better employment report and better overall economic data last week is continuing this morning; recall that Friday the only market open was the bond market. Most of Europe was closed on Friday and closed again today. At 9:00 this morning the 10 yr note traded down 4/32 to 3.95% +1 BP frm Friday and 8 basis [points from Thursday's close. Mortgages at 9:00 this morning were off 3/32 (.09 bp) frm Friday's short trading day and down 15/32 (.47 bp) frm Thursday's close. At 9:30 the DJIA opened +24, 10 yr note -6/32 (.18 bp) and mortgage prices -5/32 (.15 bp).
What appears as an improving economy is pushing equity prices higher and interest rates up. This week there isn't a lot of key data points but there is once again another week of Treasury borrowing, a total of $81B. Two weeks ago the monthly 2, 5 and 7 yr auctions were not as well bid as had been the case for most of the past year. Until those auctions traders had become rather complacent about Treasury borrowing, now this week won't be so cavalier. Since two weeks ago however, interest rates have spiked higher; is the increase enough to entice foreign investors to step up with stronger demand? This afternoon Treasury will auction $8B of 10 yr inflation indexed notes; generally not a big market mover, the main borrowing starts tomorrow with $40B of 3 yr notes.
Two data points at 10:00 this morning. The March ISM services sector index was expected to increase to 54.0 frm 53.0 in Feb. The index jumped to 55.5; new orders component increased to 62.3 frm 55.0 and the employment component increased to 49.8 frm 48.6. The ISM service sector index is the highest since May of 2006. Feb pending home sales, expected to be about unchanged increased 8.2% to an index reading of 97.6, January's index was 90.2. On a yr/yr basis pending home sales have increased 17.3%. The two 10:00 reports didn't do much for the equity markets but did see a little additional pressure on the bond market.
This week's Economic Calendar:
1:00 PM $40B 3 yr note auction
2:00 PM FOMC minutes frm 3/16/ meeting
7:00 AM Weekly MBA mortgage applications
1:00 PM $21B 10 yr note auction
3:00 PM Feb consumer credit ($1.6B)
8:30 AM weekly jobless claims (-6K to 433K)
1:00 PM$13B 30 yr bond auction
10:00 AM Feb wholesale inventories (+0.3%)
Technically the interest rates are very oversold in the very near term, all of the momentum oscillators are at oversold levels suggesting the potential of a bounce. That said, the wider perspective remains bearish as the economic data continues to improve. To change the outlook from a technical perspective the 10 yr note would have to fall back below 3.75%, witch at the moment doesn't look likely. This week's auctions will be a huge determinant on what the rate markets will do near term.
by Sigma Research