High unemployment means lower rates

Friday, January 04, 2008

ECONOMIC DATA / NEWS

Recession is looking closer by the day.  The ADP report proved to be overly optimistic once again.  According to this mornings report from the Labor Department, only 18,000 jobs were added in December.  That is well below the 70,000 job growth that was being forecast.  It caused the unemployment rate to jump up .3% to 5.0%, the highest since November of 2005.  Most of the recessions between the 1970’s and today have been precluded by a rise of .5% or greater in the unemployment rate.  Early in 2006 it hit 4.4%, so we’re now up .6% from that point.  It seems to be just a matter of time before the recession is official.

The other economic data for today, the ISM services index was perfectly in line with expectations at 53.9.  Plus, it was so greatly overshadowed by the weakness in the jobs market that most investors probably didn’t even notice the report was released.  But what we can glean from it is that the service sector showed very little signs of expanding last month while the manufacturing sector contracted.

Gold prices spiked over $868.50 after the jobs report on a flight to safety.  Investors are going to be ducking for cover in investments like precious metals, Treasury bonds, and other commodities.  Speaking of commodities, oil prices were thankfully down to $98.50 per barrel in early trading today.  Although that mystical level was breached ever so slightly yesterday, there is probably still a lot of hesitation by traders to push prices above it.  If oil prices stay lower it would seriously help inflation, especially in the face of a continuously weakening dollar.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% broke above 102.00 without even blinking.  It is currently at its highest level of the day, up 18bp at 102.09.  At this point the next support is the top of the upward trend channel around 102.30.  There is a very good chance we’ll be a lot of closer to it by the end of the day.

Plummeted isn’t a strong enough word to describe what Treasuries did within seconds of the jobs report.  The 10-year yield matched its 3-year low of 3.80% before bouncing back up to 3.85%.  It has settle around 3.83%, but it looks like it will continue sliding lower over the course of the day.

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