Morning Report: Decent jobs report

Vital Statistics:

	Last	Change
S&P Futures	2415.8	7.3
Eurostoxx Index	379.5	-0.9
Oil (WTI)	44.6	-0.9
US dollar index	88.3	0.1
10 Year Govt Bond Yield	2.38%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.06

Stocks are higher this morning after a decent jobs report. Bonds and MBS are down.

Jobs report data dump:

• Nonfarm payrolls up 222,000
• Unemployment rate 4.4%
• Labor Force Participation rate 62.8%
• Avg weekly earnings up .2% MOM and 2.5% YOY

Overall, it is a decent report. The payroll number was a bit higher than expectations. The wage numbers are certainly nothing to get the Fed worried about inflation, although we still aren't making much headway on bringing the long-term unemployed back into the labor force. Bringing those folks back into the workforce is the key (along with improving housing construction) to improving the economy from "meh" to "boom."

The bifurcation in the employment market between those with jobs and those without is evident in what recruiters are saying: It is the hottest market in memory for some headhunters and things are definitely candidate-driven. Companies have been loath to give raises for over a decade, but they may be forced to in order to attract / retain talent. 

Ray Dalio and Jeffrey Gundlach believe the top is in for the bond market (in other words, rates are going higher) and that stocks are vulnerable. Being short bonds is probably one of the biggest fast-money / wiseguy trade on the Street right now. Note however that notwithstanding the pop in yields over the past week or so, most of these guys are lugging a losing position. 

Federal Reserve Governor Jerome Powell called the current US housing system unsustainable, and pointed directly at Fannie and Fred. Here is the problem: US mortgage rates are artificially low, and that is due to government subsidies. The 30 year fixed rate mortgage is a distinctly American phenomenon. In the US, the taxpayer bears the credit risk and the lender bears the interest rate risk. Loans are guaranteed by the government, which means the lender gets paid even if the borrower stops paying. The 30 year fixed rate means the borrower has no interest rate risk - it doesn't matter where rates go, their rate stays the same. Everywhere else, the lender bears the credit risk and the borrower bears the interest rate risk (because everywhere else the rate floats with interest rates after a certain time period). Without the government backing, no lender would make loans at the rates Fannie and Fred can offer. His point is that real estate prices are based on subsidized borrowing rates and that makes the real estate market more susceptible to downdrafts. Nothing is going to change however - the US residential real estate finance market has been largely the same since the New Deal and there really is no replacement for it. Just remember this any time someone blames 2008 on the "free market." There is nothing, absolutely nothing "free market" about the US residential real estate market. There hasn't been since the Great Depression.