Ten minutes into trading, the bond market corrected yesterday’s gains lowering the very small rate increase that we saw at Tuesday’s close. Rates on the 10-year Treasury hovered around -.012% with the rate at 4.630% in the first 1.5 hours of trading.

The early morning activity was driven by a low ADP Employment Index. In fact, it was the lowest in four years. No analysts normally post predictions for this item, and it only occasionally affects rates. However, when ADP is far lower (or higher) than the previous month it can direct rate movement. That was the case this morning.

ADP’s survey indicated only 64K jobs were added to the private sector. Last month 106K private sector job growth was estimated by the ADP.

According to theory, Friday’s Payroll Growth will be at the low end of expectations. Problem is, ADP’s predictive power has been sporadic at best.

In other job related news, the Challenger Job Survey reported corporate layoffs of 70,672 last month. This had little to no impression on interest rates.

At 09:00cdt March’s Factory Orders were published. Economists were predicting growth at 1.0% to 2.4%. The market was surprised by a growth rate of 3.1%. That caused bonds to reverse course. Shortly after Factory orders came out the 10-year Treasury rate advanced to 4.6525, which was +.010%. Not a beg move in inter-day trading, but a .022% is a modest gain in intra-day trading.

We can report one win-win area. The weekly MBA Purchase Application Index posted a large gain. The Mortgage Bankers Association posted its purchase application index at 427.3. That is the highest weekly number since 20 December. The 4-week moving average – the more important number – also moved upward to 411.95, the highest since 13 January.
This is good news for most of the readers of this blog. These numbers show health in a sector of the economy that has been ailing. While the real estate sector is still in ICU, this news was a much needed sigh of life. It is also very important news that the bond market apparently ignored today’s news. If it had noticed, the bond market would have moved upwards.

The 10-year Treasury closed +.004% with the rate of 4.646%.

TOMORROW, 03 May 2007

The most important economic item will be the quarterly Preliminary Productivity report. It is a hard number to gauge making it hard to predict. It can be far outside of the predictions. Expectations are for an 0.8% to 1.1% increase. This is an odd indicator in that it can be both good for the economy and good for rates at the same time.

A portion of the Productivity report is the Unit Labor Cost. This is very important to bonds. It gives us a very accurate picture of the wage-price-spiral and the inflationary direction on the factory floor.
While important for bonds, the stock market usually ignores Unit Labor Cost. Because it is not important for stocks only one of our sources tries to estimate where it will come in at. They are looking fro a 3.6% increase. That is far lower than last quarters 6.6%. That high reading did move rates!

The weekly Initial Jobless Claims is also published at the markets opening. Last week 321K employees filed for first time unemployment insurance. Predictions are 320K to 325K will file this week. As an inverse indicator a higher than forecast number is bad for the economy. Bad for the economy = good for rates and vice versa.

At 09:00cdt {14:00gmt} ISM – Services comes out. It is forecast to be 53.0 to 54.0. Last month the Institute of Supply Managers reported Services Index at 52.4. ISM and ISM Service can both occasionally impact rates.

Monster Job Survey, the online equivalent of the Help-Wanted Index will be published before the markets open. The Dow Jones Business Barometer

Neither Monster nor Business Barometer is noticed often by the bond markets.

Friday’s Employment Situation Report May overshadow tomorrow’s data, unless there are big surprises.

Steve Boxmeyer [612] 799 – 6858
steve@LendWithIntegrity.com