Morning Report: ADP forecasting 200,000 jobs in September

Vital Statistics:

	Last	Change	Percent
S&P Futures	1894.9	20.4	1.09%
Eurostoxx Index	3105.2	75.3	2.48%
Oil (WTI)	45.02	-0.2	-0.46%
LIBOR	0.327	0.001	0.15%
US Dollar Index (DXY)	96.19	0.330	0.34%
10 Year Govt Bond Yield	2.08%	0.03%
Current Coupon Ginnie Mae TBA	104.5	-0.1
Current Coupon Fannie Mae TBA	104.2	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.85

Stocks are up this morning on no real news. Feels like end of month / quarter window dressing. Bonds and MBS are down small

The economy added 200,000 jobs in September, according to ADP. This is bang in line with the Street estimate for payrolls on Friday. Note that the initial reports of late summer payrolls seem to consistently miss on the downside and are usually revised upward in subsequent months. 

Mortgage Applications fell 6.7% last week as purchases fell 5.6% and refis fell 7.5%. 

The ISM Milwaukee index fell to 39.44 from 47.7 last month. The Chicago Purchasing Manager Index fell to 48.7 from 54.4. The strong dollar is taking its toll on manufacturers. 

All cash sales dropped to 31% in June, according to Corelogic. The historical, pre-bubble average is close to 25%. This speaks to the lack of first time homebuyers. It also speaks to an increase in gettable loans as that number reverts to the mean, even if home sales remain flat.

One of the big questions facing the Fed concerns falling unemployment and a falling labor force participation rate. Intuitively, you would think that as unemployment falls, people who are not currently in the labor force but want to be would find jobs, which would push up the participation rate. If the labor force participation rate remains low, that means the potential growth of the economy remains low, which means a slow, plodding recovery that won't feel like any sort of economic boom. It also means inflation should, at least in theory, come back as companies bid up the wages of the fewer workers that are left. So far we aren't seeing that. Millennials should be picking up the slack of retiring boomers but so far it hasn't happened. And if Millennials don't do it, then you need to pick up immigration. 

Elizabeth Warren is mad that the government is selling distressed mortgages to hedge funds and private equity firms and wants them sold to non-profit firms. She is of the opinion that hedge funds and private equity firms pursue foreclosure too quickly and said “The heart of it is these loan sales need to come with strings attached with basic outcomes for homeowners.” She is either posing for the cameras or completely uninformed: They do come with strings attached. You usually cannot foreclose for at least a year and must hold the loans for a period of several years. 

Heading into campaign season, Americans' trust in the media is at an all time low. 

Morning Report - Bond bubble talk

Vital Statistics:

	Last	Change	Percent
S&P Futures	2109.2	2.3	0.11%
Eurostoxx Index	3497.1	-54.8	-1.54%
Oil (WTI)	59.89	-0.9	-1.45%
LIBOR	0.288	0.002	0.82%
US Dollar Index (DXY)	95.28	0.181	0.19%
10 Year Govt Bond Yield	2.40%	0.02%
Current Coupon Ginnie Mae TBA	100.8	-0.2
Current Coupon Fannie Mae TBA	99.29	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.11

Stocks are lower as both the EU and Greece dig in their heels over a rescue package. Bonds and MBS are up small.

Inflation remains muted at the wholesale level. The Producer Price Index rose 0.5% in May, however that is energy driven. Ex food and energy, it was up 0.1%, or 0.6% year-over-year. The PPI is not that critical of an inflation index - the Fed uses the PCE deflator - but it shows that inflationary pressures remain contained. IMO we won't see any sort of inflation until we see wage gains, and we are only just starting to see that. 

Higher energy prices are not denting consumer sentiment according to the University of Michigan. June Consumer sentiment rose to 94.6 from 90.7 in May. 

A couple Fed researchers have crunched the numbers and believe that the natural rate of unemployment is about 4.3%, versus the 5.2% number the Fed currently uses. They focus on labor's share of income, which has fallen from 72.2% in 2001 to 62.9% now. If correct, that means the Fed has room to let the economy run. The bigger question is why the number has fallen so much. Is it weak bargaining power? Is it the fact that the emerging companies in the US need less employees? (For example, GE has a market cap of $276B and has 305,000 employees. Facebook has a market cap of $228B and has only 10,000 employees). IMO, it will come down to the labor force participation rate. Are the people who have involuntarily exited the labor force coming back? 

Cash sales make up 35% of all home sales, according to CoreLogic. That is down from the peak of 46.5% in Jan of 2011, but still well above the pre-crisis level of 25%. So for originators, this means more "gettable" business even if existing home sales don't improve all that much. I guess you can use cash sales as a proxy for distressed sales, and the places with the biggest foreclosure inventory and lowest price appreciation have the highest cash sales percent.

The raging debate in bond circles is whether we are in a bond bubble. Certainly sovereign debt yields are telling you that inflation is never, ever, ever coming back. However the bigger issue is corporate debt, which is being issued at a record pace as companies lock in low borrowing costs. If they were using that cash to build out capacity and invest in the business then there would be less concern. However, they are levering up to fund buybacks and M&A activity. That is a bigger issue. The biggest issue is that the holdings of corporate debt are now very, very concentrated in bond mutual funds, foreign investors and insurance companies. When there are bond fund redemptions, they have to sell. And new regulations regarding proprietary trading and bank capital mean that trading desks at the big investment banks are not going to absorb all that selling pressure. In addition, hedge funds are getting fewer and bigger as well. Corporate debt could get slammed hard if everyone heads for the exit all at once. Right now, the stock market is anticipating no problems when the Fed starts raising rates. That may end up being a bad bet.