DIA - July Jobs: Mixed Report Solid Wage Gains Pressure Remains On BLV

2023-08-04 09:50:06 ET

Summary

• The July employment report revealed a rise of 187,000 jobs, slightly below forecasts. The unemployment rate dipped to 3.5%.
• Wage gains were solid, posing potential problems for the goldilocks narrative on Wall Street, but a lower hours-worked figure kept rates from rising after the release.
• The Fed may still raise rates, but overall a soft landing is expected in the economy.
• I have a hold rating on Vanguard Long-Term Bond Index Fund ETF Shares, an index fund tracking long-duration Treasuries and corporates.

The July employment report revealed a rise of 187,000 jobs, slightly below the +200,000 consensus forecast. It would have been a new cycle low (since December 2020) had June’s gains not been trimmed. Private payrolls rose by 172,000, better than expected (though well under the ADP figure reported earlier this week), and the two-month revision was negative by 49,000. The unemployment rate dropped a tick to 3.5%.

On the wage front, average hourly earnings rose 0.4%, hotter than forecast, and year-on-year average earnings are now up 4.4%, two-tenths to the warm side. The average workweek came in at 34.3, equaling the cycle low, so that somewhat offsets the climb in wages. Meanwhile, the Labor Force Participation Rate came in as expected at 62.6%, also unchanged from last month. The U-6 underemployment rate dropped from 6.9% to 6.7%.

The key thing in the report was that job growth was somewhat soft, but wage gains were solid. That could pose problems for the goldilocks narrative that has grabbed hold of Wall Street in the last month, but we need to see further hot data to confirm that. Maybe we get it in next week's CPI report. Expect market participants to quickly shift their focus back to the Q2 corporate earnings story.

July Jobs: Headline Print About In-Line, U3 Rate Drops A Tick, Strong Wage Gains

A Second Straight Month of Sub-200k Job Growth

The Labor Market Continues To Ease, Services Job Growth Remains Strong

Emerging Theme: Downward Revisions to Monthly Payrolls

Equity futures did not move much in reaction to the payrolls report while bond yields were also little changed. The 2-year Treasury yield remained just shy of 4.9% while the long-end of the curve hovers near 9-month highs at 4.3%. The dollar, meanwhile, fell rather sharply in as the equity market opened approached.

30-Year Treasury Yield: Slight Rise Immediately After the NFP Report Hit

This morning’s report makes the Fed’s job a bit tougher. It appears growth may indeed be ebbing, but the wage situation is perhaps just a bit less sanguine compared to data received last month. As it stands, there’s about a 40% chance of one last rate hike, with a 1-in-5 probability that the FOMC will raise its policy rate at the September 20 meeting.

Bear in mind that we’ll get an update on the state of the economy and monetary policy at the Jackson Hole Symposium in three weeks. Overall, I see a soft landing still in play and I don’t think we should glean too much from the July employment situation reading.

Fed Watch: A Significant Chance of Another Rate Hike Remains In Play

Given today’s mixed jobs report, let’s home in on one part of the investment universe highly dependent on where interest rates are going. I have a hold rating on the Vanguard Long-Term Bond Index Fund ETF Shares (BLV) given a solid inflation-adjusted forward yield, but also bearish trends on the chart.

According to the issuer , BLV is a very straightforward exchange-traded fund, or ETF. It tracks the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index using a passively managed index sampling approach. The fund offers investors diversified exposure to the long-term, high-quality U.S. bond market. It invests in investment-grade securities including government issues, corporate and international dollar-denominated bonds that have maturities of greater than 10 years that are rated BBB- or above by S&P.

BLV can earn you a bit more than an allocation of just long-dated U.S. Treasury bonds. The current yield to maturity is listed at 4.8%, but that is as of June 30, 2023, on the Vanguard website. The long bond is up about 40 basis points since then while credit spreads have remained tame, so I assert that the current true yield is near 5.2% - that is about 2.3% above the expected rate of inflation over a comparable span given where TIPS yields are today.

Based on my research, this is an 11-year high. So, locking in a position on BLV today is actually a solid play for investors seeking high-grade bond exposure, but you could execute a similar strategy by buying 30-year TIPS from the government (though you would not have any corporate credit exposure). Of course, BLV is also a nominal bond – there is no guarantee regarding inflation and the ETF houses a large chunk of corporate credit.

The fund’s expense ratio is about as low as you will find in the market at just 0.04% and total assets are high at $5.5 billion. The portfolio, according to Morningstar , is about a 50/50 mix of long-duration Treasuries and long-term corporates, so there’s diversification in that respect. But it is important to recognize that both swaths of the fixed-income market within BLV are high-quality and long-dated, so you should expect a somewhat high correlation between the two primary sub-asset types housed in the fund.

Liquidity is strong, with 50-day average volume north of 600,000 shares and a median 30-day bid/ask spread of just four basis points. With an effective duration of 14.5, an instantaneous 1% move higher in long-term interest rates would result in a 14.5% NAV drop, all else equal.

BLV: About a 50/50 Splits Between Long-Term Corporates & Treasuries

Seasonally, we actually tend to see strength on the long end of the Treasury curve as well as long-duration high-grade corporate credit during August, according to data from Equity Clock , so BLV selling off is something particularly concerning from a technical perspective.

BLV: Bullish Seasonal Stretch Not Showing Itself

The Technical Take

BLV closed on Thursday at $70.47 - the lowest settle since November last year. It appears a bearish breakdown is underway, and all eyes are on the upper $66s where the ETF bottomed out in October 2022. That corresponds to about 4.5% on the 30-year Treasury yield, but much also depends on what credit spreads on the long end of the curve do.

Also notice in the chart below that BLV’s RSI momentum reading has been stuck in the bearish 20 to 60 range while its long-term 200-day moving average is downward sloped, suggesting that the bears are in control of the trend. Lastly, even if we do see a rally, there’s a high amount of volume by price in the $72 to $79 range that may be tough slogging for the bulls.

Overall, it’s a bearish trend, and going long in the mid-$66s appears to be a better play than buying above $70. A breakout above the $79 level would help support the case of a bearish to bullish reversal.

BLV: Bearish Breakdown in Progress, Long-Term Trend Lower

The Bottom Line

I have a hold rating on Vanguard Long-Term Bond Index Fund ETF Shares. Long-term investors should consider owning the ETF for its better yield today, low cost, high liquidity, and focused approach. But near-term technicals suggest caution, and today’s mixed jobs report doesn’t change that trend outlook.

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