EDP and Mortgage Bonds Weathering the Storm: A Deep Dive into the Economic Scenario


By now, we’ve all seen that the ADP jobs report presented a significant number, but surprisingly, mortgage bonds are up, seemingly weathering the storm. Even more reassuringly, the debt deal looks to be nearing completion, a development that will likely allow mortgage bonds to resume a more predictable trading manner.

EDP and Mortgage Bonds: The Current Scenario

Good morning, everyone. Our analysis begins with the ADP jobs report and its implications on mortgage bonds. These bonds stand strong amidst economic fluctuations, showing resilience even as the 10-year Treasury note contends with a fundamental level of support at its 200-day moving average.

Moreover, the debt deal is on the brink of being settled. While some Senate members are making some noise, if this deal gets over the line, it will allow mortgage bonds to revert to more traditional trading patterns. This would be a welcome change from the market volatility we’ve seen recently.

Fed Members Weighing Options: To Skip or Pause Rate Hike

In addition to the developments in the debt deal, we’ve also heard from Fed member Jefferson and Fed member Harker, who are contemplating skipping a rate hike on June 14th. But what’s the difference between skipping a rate hike and pressing a pause?

When we consider “skipping,” it implies that while the Fed may not raise rates this time, they’re not necessarily done hiking. They might wait to gather more data and information to evaluate whether they should continue the rate hikes at the next meeting. On the contrary, “pausing” indicates that the Fed may lower rates in the future.

Dissecting the ADP Report: Anomalies and Market Focus

Despite boasting a strong headline number of 278,000 jobs – 100,000 more than expected-, the ADP jobs report had several anomalies. For instance, leisure and hospitality thrived, contributing 208,000 out of the 278,000 jobs. Mining and resources also saw significant job creation, almost 100,000 jobs, which could be a one-off.

However, the market seems more focused on wages, as wage trends directly impact inflation. Notably, those who kept their jobs saw a 6.5% year-over-year wage increase, down from 6.7% in the previous report. Those who switched jobs witnessed a wage increase of 12.1%, almost a full percentage point lower than the last report at 13%.

Jobless Claims, Layoff Reports, and Future Predictions

Alongside the ADP report, we also received initial jobless claims data, which remained flat week over week at 232,000. The elevated continuing claims number, hovering near 1.8 million, indicates that it takes more work to find a new job once unemployed.

Furthermore, the Challenger Layoff report for May demonstrated a 20% increase in layoffs, raising questions about when this trend will reflect within the job landscape. Tomorrow’s BLS report is expected to shed light on wage growth, job creation, and possible changes in the unemployment rate.

Mortgage Bonds and the Road Ahead

The mortgage bonds market seems optimistic, looking past the robust job creation number and focusing more on wages. If the debt deal concludes and we start seeing more normalized trading, it could lead to potential improvement. However, given several unpredictable factors like the birth-death ratio of jobs, we must tread cautiously.

While a weaker BLS report tomorrow could potentially boost the markets, it’s tough to predict what will happen with tomorrow’s jobs report. Despite the uncertainty, we remain hopeful for a more stable and predictable trading environment.