Unemployment up, Rates down

Thursday, September 06, 2007

ECONOMIC DATA / NEWS

Weekly jobless claims were lower last week at 318,000, but they remain elevated from their summer average in the low 300K range.  This data also comes out just as Countrywide announced an additional 900 layoffs.  Although this is a lot of people, it is a small cut for a company like Countrywide who employs 60,000 people.  The longer term trend of weekly claims should be upward, and the unemployment rate is expected to hit 5.0% by the end of the year.

There are rarely any surprises from productivity and unit labor costs data, because they come out a week after GDP.  Naturally, with GDP being revised higher, productivity was up, and labor unit costs were effectively lower.

Finally, August’s ISM services index was identical to July at 55.8.  Considering slowdowns in the financial sector, this is somewhat surprising.  We will probably see this index slip closer to 50.0 in September.

None of this morning’s data is of great concern to market watchers.  What they will be more focused on is tomorrow’s employment numbers, which could either reaffirm or dispute the weakness in the economy.  Based on the ADP employment report, the number of announced layoffs, and the increase in weekly jobless claims during August, it is a good bet that payrolls grew at a pace well below 100,000.

TECHNICAL ANALYSIS

After an insane rally like yesterday’s, we should be quite content with the FNMA 30-year 6.0% leveling off at 100.22 this morning.  Prices are a few basis points over the 200-day moving average, and if prices close above this line, it will become our first support. 

Treasuries are flat as well.  The 10-year yield is up a couple basis points from yesterday’s close.  However, it is consistent with where the yield sat for the majority of
Wednesday, around 4.48%.  As we talked about last week, I believed the 10-year yield would be down to 4.45% within the next few weeks.  The extra volatility has helped us get there ahead of schedule.  We can see from the chart that the head-and-shoulders formation has proved to be extremely accurate, which means the yield should end up close to 4.10%, and possibly lower once it gets to that point.

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