Markets brace for Friday's employment data

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Published Date 8/28/2017

Flooding in Texas is dominating in the news but doesn’t have any noticeable effect on markets this morning; in pre-open trading stock indexes traded better, the 10-yr. note yield up 1 bp to 2.18% and MBS prices -3 bps from Friday’s closing levels.

This is a huge week for data. Treasury will sell a total of $88B of notes today and tomorrow. Economic data this week is loaded with August employment data on Friday. It is a heavy calendar (see below).

US stock leaders this morning: the home improvement companies (Home Depot) on demand for materials after the flooding in Texas. Refineries hit by floods have pushed gasoline prices higher; news, though, is that the refineries had shut down prior to Harvey thus not as much damage as expected. Crude oil is lower because refineries aren’t using much at the moment.

Most news recently has been about Harvey; the major focus for markets, however, is the return of Congress next week. Every two years we suffer from the debt ceiling increase, and it's back now. You will hear and read numerous reports about the potential for a government shutdown and a US debt default; it should be ignored. In fighting between Republicans and Democrats, the threat is always raised, but the reality is the US has never defaulted on its debt, and it will not happen this time. Trump last week threatened to shut down the government unless he gets the money to build the Wall, just blustering as is his norm. Congress gets back on the 5th of September, but our hard-working legislators will also get a break later in September. Just 12 working days to get the debt ceiling increased so we'll hear a lot of comments and some mud-slinging in September.

If Congress fails to pass a new spending bill by September 30, most non-emergency functions of the US government will halt, furloughing workers, closing office buildings and public facilities, delaying paperwork, and more. The last time Congress dealt with this issue was October 2015, when it suspended the debt limit, then at $18.1 trillion, until March 2017. Since March, the Treasury has been using emergency cash-management techniques to avoid breaching the limit. Back in 2011, when the debt ceiling issue was on the table, Treasury did make plans that if the debt ceiling wasn’t increased to pay debt holders, but social security, government employees and military would not have been paid.

This week’s more immediate focus is on the many key economic reports that hit; the most important, the August employment data on Friday. Suggest perusing the week’s calendar below for the details. Most of the data reported this week is key to economists’ and analysts’ forecasts and market expectations.

We remain bullish for the bond and mortgage markets based on our technical analysis but also we are cognizant that at these levels rates will have a tough time declining much. It will take heavy selling in the stock indexes or some kind of an unexpected black swan event to appreciably drive rates much lower.

This Week’s Calendar:

Monday
- 8:30 am EDT July prelim. US trade deficit (as reported $-$65.1B, estimates were -$64.1B); imports -0.3%, exports -1.3%.
  - July prelim. Retail inventories (as reported-0.2% )
  - July prelim wholesale inventories (+0.4%)
- 11:30 am $26B 2 yr. note auction
- 1:00 pm $34B 5 yr. note auction
Tuesday
- 9:00 an June Case/Shiller home price index (5.7% yr./yr. unchanged from June; month/month 0.5%)
- 10:00 am August consumer confidence index from the Conference Board (120 from 121.1 in July)
- 1:00 pm $28B 7 yr. note auction
Wednesday
- 7:00 am MBA weekly mortgage applications
- 8:15 am August ADP private jobs (+182K)
- 8:30 am Advance Q2 GDP (+2.8% from 2.6% on the prelim last month; inflation deflator +1.0%)
Thursday
- 8:30 am weekly jobless claims (237K +4K)
  - July personal income and spending (income +0.4%, spending +0.4%; Personal consumption expenditures +0.1%; core expenditures +0.1%)
- 9:45 am August Chicago purchasing mgrs. index (58.0 from 58.9 in July)
- 10:00 am July pending home sales from NAR (+0.8%)
Friday
- 88:30 am August employment data (unemployment rate 4.3% unch from July; non-farm jobs +180K, private jobs +177K; average hourly earnings +0.2% down from +0.3% in July)
- 10:00 am August ISM manufacturing index (56.6 from 56.3 in July)
  - July construction spending (+0.6% from -1.3% in June)
  - U. of Michigan consumer sentiment index final for August (97.2 from 97.6)
- No Time August auto and truck sales (16.7mil Unchanged from July)

Source: TBWS

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