Market Update July 6, 2007

Current Price of FNMA 6.0% Bond: $98.38, -12bp

The June Jobs Report was as we expected, higher than anticipated at 132,000 new jobs being created – and another 75,000 new jobs were added via revisions to April and May. Bonds are moving lower, yet some of the damage was already “cooked in” after yesterday’s ADP report gave hint of a strong Jobs number today.

In other details from the Report, Average Hourly Earnings rose by 0.3% for a 12-month gain of 3.9%, and the Unemployment Rate remains at a low 4.5%. Overall, this report indicates a very healthy labor market – which gives the Fed continued reason to be concerned over “wage-based inflation”. This means that as employees are paid more – they have more money to spend on goods and services, which can drive prices of consumer products higher with the added demand. Additionally – employers that have to continually pay higher wages to their employees may have to raise the prices of their own goods and services, just to help retain their profit margins. This very real concern will keep the idea of a Fed rate cut on the back burner for now.

Technically, Bonds have now been pushed all the way back below the Falling Resistance Line, as we were concerned could happen. One positive note is that Bonds did bounce higher after hitting important support at $98.31 and are now being squeezed between the overhead Falling Resistance Line, and this support level just underfoot. It will be interesting to see who wins this battle – the Bulls or the Bears, especially in light of next week’s slim economic news calendar. The biggest report of interest (Retail Sales) does not arrive until Friday, and with no immediate catalyst to help drive Bond prices higher or help them fight back above the Falling Resistance Line – it appears the tone may be negative for Bonds in the near term.