Matt Graham, Founder and CEO, MBS Live
[Matt] This is Matt Graham with the MBS live market update. Last week was an interesting one shortened by the independence day holiday, and it got off to a much weaker start for the bond market. And that was a carry over trade from the previous Friday. Itself sort of suggested to be a factor of either the presidential debate or month end trading. In retrospect, with the benefit of last week’s trading activity and headlines, we’re honing in on the fact that it probably had more to do with month end and new month trading positions, considering the presence of some specific headlines, one in particular was notable in that it was possibly a little bit of clickbait on the part of New York times, suggesting that Biden was considering dropping out of the presidential race. Those were not his exact words. It was subsequently revised and clarified, but the important part was that the initial headline was immediately circulated aggressively in newswire format and it had no impact on financial markets. There was no volume uptick in treasury futures. There was no movement in bond yields. Contrast that to several examples throughout the week of economic data, having an impact on bonds. And it becomes more clear that the bond market is indeed adhering to the fed’s data dependent mantra and that the volatility experienced on Friday and Monday likely had just as much if not more to do with month end and new month trading and dynamics that out of the way Here’s a quick rundown of last week’s key events and associated market reactions Monday’s key release was ISM manufacturing which came out weaker than expected at forty eight point five That’s in contractionary territory. The price is paid component dropped quite a bit from 57 last month to 52.1, both of those things are good news for the bond market. But again, Monday was dominated by new month trade flows and the positive impacts from ISM weren’t long lived Tuesday. Things got a little bit better. Chair Powell had a speech or And, helped the bond market sort of stomach a slightly higher job openings reading in the jolts data. On Wednesday, we had ADP jobs, pretty much a non event recently, and that left the door open for the day’s other economic reports to have a bigger impact going into the holiday. Jobless claims rose again, 238 versus 235. That’s elevated compared to most of the recent baseline and, uh, the continued claims number at 1858K versus 1832K is also elevated and trending higher. People are on the lookout for labor market deterioration as that would be a sign that the Fed could go ahead and consider rate cuts. More readily than they otherwise are interested in doing. Ultimately, it will be inflation data that does the most to inform that, but if they’re on a fence due to inflation data, the employment data will sort of be the tie breaking vote. ISM non manufacturing or ISM services was out later that same morning. It was much weaker than expected, the lowest reading. Since it was, well, really, since the great financial crisis, if you want to be fair, because you have to go back to the pandemic lockdowns to see a lower reading and most market watchers and economists would throw that out if they’re looking for relevant historical baselines. So, really, the only relevant historical baseline is the great financial crisis, and that’s a pretty high level of weakness when it comes to. A very important economic report like ISM services. There were really no redeeming factors for the data. It was weaker across the board in terms of business activity, employment, even the prices component was lower than previously, although not quite as low as we would like it in order to indicate a victory in the inflation battle. Markets were closed. For the 4th, of course, and then on the 5th, we had the big jobs report. It came out stronger than expected at 206K versus 190, but markets ended up shrugging that off and actually moving into much stronger territory by midday. Chalk that up to a rise in the unemployment rate that’s a little bit mitigated by a rise in the labor force participation rate. But more importantly, the revisions to the headlines payroll count or the headline payrolls count were quite large taking the last month down to 18 from 272. And the month before that was revised down substantially as well. All told revisions far outweighed the beat versus this month’s expectation. And really over the past three months sort of change. The trend from sideways to slightly stronger to sideways to slightly weaker the sort of labor market slack or Modest deterioration that the Fed is looking for in order to bolster the rate cut case This week is critical in that regard because it brings CPI the big consumer price index on Thursday That will do more than anything to inform rate the rate cut agenda. Not that it’s an agenda, but rate cut potential, let’s say, and the market is looking for a 0.2 reading at the core. If it were to come in at 0.1 or even 0.2, that is rounded up from a 0.15-ish, that would really be the best evidence that we’ve had in several years that we are finally turning the corner on inflation. And it would greatly bolster the case that the market is already making for the first rate cut to happen in September. That’s going to do it for this week. Back to you.