ISM Services, Non Farms & Bonds

Unemployment 4.7% vs prior 4.9%; a 5 year low and portent of a tighter labor market. Hourly Earnings +0.4% vs revised prior +0.4%; both fueling the inflation fear fire.

Non Farm Payroll +193K vs prior +108K; not the 250K est. but enough to spark inflation fears. +193K read correlates with 3.5% GDP for Q1, bonds initally sold off pushing the 10 year to 4.61 but then rallied to 4.52? Sniff, sniff. More later.

We dont buy the numbers,
see related story. And neither did the bond market, or did they? More later.

Factory Orders +1.1% vs revised prior +3.3% vs prior +2.5%; durable goods +1.8%; defense aircraft & parts orders +31.0%; non defense aircraft & parts -8% (due to a drop after Boeings big orders in NOV.); car and parts orders +6.7%;

Inside the number: Factory Orders ex transportation +0.9%; ex defense +0.8%. non defense capital goods -0.2%.

Way inside the number, going ex non defense aircraft & parts (-8%) yields +4.1% on non defense capital goods. This is a good proxy for business spending.

Inventory to shipping ratio shrinking to 1.15 months vs prior 1.17 showing a reduction in economic slack.

Mich Sentiment 91.2 vs prior 93.4; ISM Services 56.8 vs prior 61; softer reports contrasting Factory Orders. ISM entails 90% of the economy and mirrored the Q4 drop in GDP. Who cares? Keep reading.

Prices had dropped and yields had risen 17 bps in the last two weeks. This correction dropped yields just prior to next weeks big triple auction 5, 10 and 30yr, where post new years Chinese interests will take anything over 4.5.

The bond market seemingly put no credence in Non Farms or Factory Orders, chosing to believe a falling ISM, GDP and softer sentiment.

We think the opposite, they are very fearful of inflation and energy pass through, hence the contrary behaviour in a bond rally which lowered yields.

Todays reports and bond market reaction CLEARLY demonstrate that any perceived threat to US consumer spending in the form of inflation or higher energy cost pass through will be met by the BOND market lowering the high end.

This is contrary to what should be happening and risks putting the 30 year under the 2 year. There are too many hedge funds and foreign interests keeping rates artificially low.

We believe certain interests could be setting up the bond market for a rude surprise. This would bring pain to housing & the (MBS) market.

Devaluation and higher interest rates may ensue, so be it. The ensuing pain will do good in the long run by forcing us and the foreign interests to correct bad economic behaviour and adjust accordingly.

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