Labor Market Stumbles

Labor Market Stumbles

Mortgage bonds continue to move closer to the top of the trading channel. This move has been fueled by signs of weakness in the U.S. economy, primarily a weak reading on new hires in the month of June put out by ADP. It was reported that there were only 102,000 new jobs created last month, which is a sharp decline from the 6-month average. In fact, the trend has been falling, which I believe is just the beginning. As most economists, including the Fed, have believed, the strength of the labor market is the single greatest reason the US will avoid a recession. I believe the exact opposite to be true. One of the greatest predictors of a recession is an overheated job market. When the labor market is at its peak, it is immediately followed by a recession. I believe the recession is just around the corner.

 

As bond prices reach the top of the trading channel, we must be careful. Since break outs are the exception and not the rule, we will likely see bond prices fall after hitting the top of the trading channel. The key to this could come on Friday, when the Bureau of Labor Statistics (BLS) provides their estimate on labor market strength. If this report also shows weakness, bonds could gain the strength needed to make a break higher. That would put rates even lower. But again, that would be the exception and not the rule.

 

There is great risk in floating. We remain cautious in the short term and optimistic in the longer term. Lower rates ahead!