After hitting the top of the trading channel, mortgage bonds took a a sharp drop in early morning trading. Although this move aligns with an expected technical drop lower, it is being attributed to this morning’s Bureau of Labor Statistics’ (BLS) job report that showed stronger than expected job gains in the month of June. While the market was anticipating 160,000 new hires, the report showed that there were 224,000. Although this report was a clear contrast from the very low report we received on Wednesday from ADP, this is considered to be the most reliable and important reading on the labor market.
Another surprise was the Unemployment Rate, which ticked higher from 3.6% up to 3.7%. To explain why the Unemployment Rate moved higher while job growth was strong is due to how each report is decided. The Unemployment Rate is actually derived through surveys that are performed each month. The survey showed that there were 247,000 job losses, which is a strong contrast to the gains in the job growth numbers reported. I’m my opinion, the labor market is on the verge of taking a sharp move lower. Since job growth is the reason most economist have believed we will avoid a recession, I believe many economists will soon have some explaining to do. I continue to strongly believe we are on the brink of a recession and think that people should adjust their investment holdings accordingly. There is always money to be made during recessionary times. Now is a great time to rebalance portfolios.
Although mortgage bonds have fallen sharply, I believe this move is expected and temporary. I maintain a longer term floating stance. In the short term, I see bonds bouncing off the floor and improving in the near term. Lock if you can’t stomach the risk.