Updated on June 1, 2023 10:09:56 AM EDT
Yesterday afternoon’s release of the Fed Beige Book didn’t reveal any significant surprises. Feedback from business contacts throughout each Fed region pointed towards a still tight labor market, where some job openings were difficult to get filled. However, there are signs of slower hiring needs in some regions that are easing the situation. Another key topic is inflationary pressures that appear to still be rising, but at a modestly slower pace. In short, employment and inflation are still strong even though they appear to be slowly trending in a bond-friendly direction. The bond market had already improved between morning pricing yesterday and the 2:00 PM ET release of the report. We did see another positive move after the release, causing some lenders to make an intraday improvement to rates before closing.
The first of this morning’s batch of economic data was May’s ADP Employment report at 8:15 AM ET. It revealed 278,000 new private-sector jobs were added to the economy last month, exceeding forecasts of 160,000. That number was a little smaller than April’s downwardly revised 291,000 new payrolls. The wide variance from expectations raises concern about what tomorrow’s major employment data will tell. Bonds initially reacted negatively to this report before other data caused a rebound.
Good news came from the revised 1st quarter Productivity and Costs update that measures employee output and employer costs for wages and benefits. The productivity reading was revised higher (-2.7% to -2.1%) while the labor costs reading was changed from up 6.3% to up 4.2%. It is the labor costs figures that helped reverse early morning losses caused by the stronger ADP number, allowing us to label this report good news for rates.
Last week’s unemployment update at 8:30 AM ET was uneventful, showing 232,000 new claims for benefits were filed. Analysts were expecting to see 233,000 initial filings, up from the previous week’s revised 230,000. Rising claims are a good indicator of a weaker employment sector, but this was a minor change in a weekly report. Accordingly, it has had no impact on this morning’s bond trading or mortgage rates.
The most important of this morning’s economic releases was the Institute for Supply Managements (ISM) May manufacturing index at 10:00 AM ET. They announced a reading of 46.9 that fell short of the 47.1, which was expected to match April’s reading. A decline in this index is considered to be a sign of slowing manufacturing activity, making the report good news for bonds and mortgage pricing.
This week’s activities end tomorrow with the release of the almighty monthly Employment report at 8:30 AM ET. This extremely important data will give us key employment readings such as the U.S. unemployment rate, the number of jobs added or lost during the month and average earnings change. Forecasts show the unemployment rate rose 0.1% to 3.5% this month with approximately 190,000 jobs added and a 0.3% increase in earnings. A higher than expected unemployment rate and a much smaller increase in payrolls would be favorable news for mortgage rates. Bonds are particularly sensitive to the earnings increase also, meaning the smaller the rise in that number, the better the news it is for rates. This report carries enough significance to be a market mover and may also alter the Fed’s monetary policy plans during June’s FOMC meeting.
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