Friday, July 07, 2006

Friday Open -- Mixed Bag

Everyone is initially going to focus on the meager jobs number -- 121,000 versus the ADP survey which had said 360,000. Bonds and FF futures are rallying. Don't forget about the hourly earnings figure, though, because that number speaks more directly to inflation pressures than jobs added. Just seeing that the economy has added 121,000 jobs is one thing, but in order for prices to rise, people have to be able to pay more. Wal-Mart can't raise the price of deodorant if no one is willing (or able) to pay the higher price. So one can argue that hourly wages is a more important figure. This number accelerated in June to +0.5% from 0.1% in May.

So on the jobs number, we got my bullish scenario (congrats Jay), but I think the rally will be a bit more muted than I thought because of the hourly earnings number. Curve is flatter by 1bp, swap spreads are tighter by 1/2bp, MBS trailing Treasuries, so out of the gate, I feel pretty good about yesterday's bold prediction. No, I'm not above patting myself on the back.