Morning Report: Productivity falls again

Vital Statistics:

	Last	Change	Percent
S&P Futures	2051.5	-9.9	-0.48%
Eurostoxx Index	3055.8	-69.6	-2.23%
Oil (WTI)	44.22	-0.5	-1.04%
LIBOR	0.638	0.004	0.63%
US Dollar Index (DXY)	93.18	-0.583	-0.62%
10 Year Govt Bond Yield	1.79%	-0.01%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.63

Markets are down this morning after some disappointing economic data. Bonds and MBS are flat.

We got some lousy employment / labor data this morning, starting with the ADP jobs report, which shows the economy added 156k jobs last month. The Street was looking for 195k, so this is a big miss. Friday's jobs number is expected to come in around 200k.

Nonfarm productivity fell 1% last quarter, while unit labor costs increased 4.4%. On an annualized basis, productivity has been negative 3 out of the last 4 years. The back-to-back drop is the lowest since 1993. Firms are hiring workers, but uncertainty over the economy is holding back capital expenditures. Unit labor costs increased 4.1% last quarter. This in part might explain why profits this quarter have been weak so far.

Mortgage Applications fell 3.4% last week as purchases fell 0.1% and refis fell 5.5%. 

In other economic news, the service economy continued to expand, with the ISM Non-Manufacturing index improving to 55.7. Durable Goods orders rose 0.8%, but fell 0.2% if you strip out transportation. Factory orders rose 1.1%, while capital goods orders ex defense and aircraft (a proxy for business capital expenditures) rose 0.5%. So a mixed bag overall.

Ted Cruz dropped out of the presidential race last night, paving the way for Donald Trump to be the nominee, unless the party decides to rally around John Kasich at a contested convention. If Gary Johnson were a stock, he would be a screaming buy at the moment. 

We have seen an uptick in the labor force participation rate over the past few months from lows not seen since the 1970s. What is going on? While the hope is that a hot labor market will draw the long-term unemployed back into the labor force, what is really going on is that fewer people are leaving. You can see this borne out in the initial jobless claims data, which is the lowest going back to 1973. People who have jobs are keeping them. For the Fed, this creates a bit of a conundrum. They want more people to re-enter the workforce, but if business has to compete for the current labor pool by increasing wages, the Fed will have to put the brakes on the economy sooner than they would like.