Morning Report: Strong jobs report

Vital Statistics:

	Last	Change
S&P Futures	2389.0	3.5
Eurostoxx Index	391.7	-0.3
Oil (WTI)	45.1	-0.4
US dollar index	89.9
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.625
30 Year Fixed Rate Mortgage	4.02

Stocks are up after the strong jobs report. Bonds and MBS are up as well.

Jobs report data dump:

• Nonfarm payrolls + 211,000
• Unemployment rate 4.4%
• Labor force participation rate 62.9%
• Average hourly earnings up 0.3% MOM / 2.5% YOY

Overall a strong jobs report. The unemployment rate is the lowest in a decade, reaching close to the cyclical low right before the real estate bubble blew up. Despite the low numbers we have yet to see much in the way of wage growth. The employment-to-population ratio, which is the Fed's preferred employment indicator, rose to 60.1%.  The U-6 unemployment indicator (which is more broad and includes the long-term unemployed) fell sharply during the month from 8.9% last month to 8.6%. U-6 is down 1.1% YOY. U-6 measures how much slack there is in the labor market, and as that slack is taken up wage inflation should return. This report shouldn't really move the needle for the June FOMC meeting and the Fed. 

Yesterday, the House passed narrowly its Obamacare replacement bill, and it will now head to the Senate where it will be ignored and slow-walked. The House bill was never scored by the CBO, and pushed through on short notice, which pretty much tips the GOP's hand that this was never intended to actually become law and has a 0% chance of surviving intact. FWIW, the bill is really the Republican Primary Prevention Act of 2017, which is to say merely a political gambit. The Senate may also be waiting to see what insurance rates look like for 2018 and also how many drop out of the exchanges. The only way to get Democrats and moderate Republicans on board is if they see the Obamacare exchanges failing.  

Now that Obamacare is out of the way in the House, their attention will turn to tax reform. Individual tax reform will get zero support from Democrats, however there might be some common ground on corporate taxes. 

Fannie Mae reported income of $2.8 billion for the first quarter, all of which will go to the government sometime in June. Total equity has fallen from $6.1 billion at the end of last year to $3.4 billion at the end of Q1. This is the problem the government has to address with the current regime: sending all profit to Treasury is eroding Fannie's capital. This is one motivation to get the government serious about GSE reform, although it isn't a high priority in Washington at the moment. 

Inflation continues to be tame, and part of that is being driven by oil, which has fallen 15% over the past few weeks. The rally in oil that began with OPEC's plan to cut production has been completely given back. While the Fed will undoubtedly characterize oil as a transitory phenomenon it does flow through to other products and can help drive inflation.