Risk in floating

The Bureau of Labor Statistics released their report for new job creations in the month of June. It was reported that 223,000 new jobs were created. This was slightly lower than the 230,000 estimated. In addition, May’s blockbuster report of 280,000 was revised lower down to 254,000 and April’s initial report of 221,000 was revised down to 187,000. Overall, there were 60,000 in downward revisions to the prior two months’ reports. This shows that the job market may not have been as strong as believed. However, it was reported today that the Unemployment Rates unexpectedly fell from 5.5% down to 5.3%. But, a deeper look at the numbers shows that this reduction arose from the Labor Force reducing by 432,000 people. The Household Survey, which is where the Unemployment Rate is derived, shows an overall reduction in Jobs of 54,000 for the month of June. The discrepancy between the two makes many economists question the accuracy of the BLS report.

The report also showed that wage growth was flat for the month. Since wage growth is a strong indicator of future inflation, this is a figure that we closely monitor. The year over year average hourly earnings rate actually decreased from 2.3% down to 2%. The dramatic reduction was due to replacing the higher number from 12 months ago with this month’s 0% rate. With the flat number now in the 12 month average, the year over year figure dropped dramatically. This signaled a cooling off of inflationary pressures. This was well received by the bond market, which is why we are seeing a nice improvement in bond yields today.

The financial markets will be closed all day tomorrow in observance of the 4^th of July. Although there is no immediate need to lock, bonds are nearing the top of the downward trading channel that has driven mortgage rates higher the few months. For rates to make much of an improvement, bonds will need to break out of this channel. Since it is far too early to predict a breakout, there is great risk in floating an interest rate.