This morning’s jobs report showed payroll creation at 528k for July compared to a median forecast of 250k and a previous reading of 398k.  Perhaps equally as damaging to the bond market, wages came in at 0.5 vs 0.3 f’cast and were revised up another 0.1 last month.  Potent arguments against recession (or in favor of wage inflation) spell trouble for bonds.  This morning’s reaction has been immediate and severe, as was the similar argument made by the ISM services data 2 days ago.  These two reports account for the biggest selling sprees of the past several weeks.

In terms of nearer-term Fed rate hike expectations, today’s jobs report was even more damaging than ISM.  Traders now see the Fed hiking another quarter point by the end of 2022.

The damage done by the strong economic data hits bonds in a different way compared to the inflation reports that rocked the market in June and July.  Inflation does more to push rate expectations up in the shorter term whereas strong econ data keeps rate expectations higher for longer.  The chart below shows how this played out between July’s CPI inflation data and the more recent ISM Services report and today’s jobs report.

 Notably, the strong data has helped the green line close the gap to the orange line.  In other words, in late July, traders saw the Fed Funds Rate being a quarter point lower by mid 2023 vs Dec 2022.  Now they don’t see much difference at all. 
If there’s a saving grace it’s that the market has been less and less troubled by the data compared to June’s CPI.  That said, June’s CPI report came out only a few days before the Fed announcement and markets weren’t certain how the Fed would react.  This time around, their reaction function is better understood.

Published On: August 5, 2022 / Categories: Mortgage News /