August 2. Yields surge in front of today’s Employment Report
–The last employment release on July 5 was when rates previously hit their highs for the year, 161.4 in fives, 2.74 in tens, 3.714 in bonds. Yesterday, the bond yield exceeded that high by 6 bps, but tens were about 2 bps shy at 2.72 and fives 11.5 below the old high at 1.50. Stronger than expected data overwhelmed Wednesday’s Fed statement with tens leaping 14 bps in yield and gold eurodollars -17.5 (in price). ISM was 55.4, vs previous 4 months which had been clustered around 50. Red/gold pack spread hit a new high of 289, up 12.25 on the day as curve steepened. 2/10 up to 239, also a new high.
–Today’s employment report expected to show a gain of 175-185 in NFP with 7.5% rate. Also released today, Personal Income and Spending, with Core PCE price index expected +0.1.
–Stocks roared to the upside, defying expectations of Fed tapering. On the other side of the world, Toyota reported strong earnings, the direct result of a weaker yen, and the Nikkei is up 40% year to date with a 3.3% gain today, as Japan ramped up QE efforts this year. So Japanese equities have responded directly and emphatically to QE, while the Fed’s plan to wean the market off of QE has had no discernible effect except in the long end of the curve.
–Regarding the effect of higher mortgage rates on housing, a $200k, 30 yr loan at 3.5% is $898/mo. At 4.5% it’s $1013…only $115 more a month, but still, an increase in the monthly payment of 12.8%. Enough to derail housing? Perhaps not, but certainly a headwind.
