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Morning Report: The labor market remains strong


Vital Statistics:

Stocks are flattish after a the jobs report. Bonds and MBS are up small.

The economy added 209,000 jobs in June, according to the Employment Situation Report. This was more or less in line with expectations and much lower than the ADP report yesterday. The unemployment rate slipped to 3.6%, while average hourly earnings increased 0.4% MOM and 4.4% YOY. Job openings fell 500k to 9.8 million. After declining for two months, the quits rate increased to 2.6%, which is leading indicator for wage growth.

Wage inflation is the Fed’s biggest concern now, and it seems to have plateaued around this level for the past several months after declining in the second half of 2022. Pre-pandemic, average hourly earnings were increasing at around 3.5%, so we still have some ways to go in order to get back to a level the Fed is comfortable with.

The 10 year bond yield is off slightly from yesterday’s highs, but we are still solidly above 4%. The two year is up as well, trading at 4.97%.

If you look closely at the chart above, despite the increases in rates, the yield curve remains highly inverted. The distance between the two lines indicates yield curve inversion. The bigger the distance, the more inversion. The labor data is indicative of a roaring economy, but the yield curve is blaring recessionary signs.

Lock volume increased 31% in June according to the MCT Rate Lock Index. “We saw originations towards the end of May slow down, so this is likely a summertime pickup in originations”, said Andrew Rhodes, Senior Director and Head of Trading at MCT. “Rates, housing supply, and affordability will continue to be the forces behind the lack of new originations.”

The ISM Services Index increased in June, which was the sixth consecutive expansion. New orders and business activity increased, while prices moderated. “There has been an uptick in the rate of growth for the services sector. This is due mostly to the increase in business activity, new orders and employment. Increased capacity, backlog reduction and continued improvements in logistics have impacted delivery times (resulting in a decrease in the Supplier Deliveries Index). The majority of respondents indicate that business conditions remain stable; however, they are cautious relative to inflation and the future economic outlook.”

June Employment Report: 209 thousand Jobs, 3.6% Unemployment Rate

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