Morning Report: Job cuts fall

Vital Statistics:

			Last	Change
S&P futures			2725	1
Eurostoxx index			386.51	1
Oil (WTI)			67.49	-0.72
10 Year Government Bond Yield				2.86%
30 Year fixed rate mortgage				4.47%

Stocks are flat this morning after personal incomes came in as expected. Bonds and MBS are flat. 

Personal Incomes rose 0.3% in April, in line with expectations. Personal Spending rose 0.6%, higher than the 0.4% estimate and inflation was tame at 2% YOY, with the core rate up 1.8% YOY. The big jump in consumer spending will probably have some strategists taking up their estimates for Q2 GDP. March and February spending numbers were revised upward. Inflation remains in check, which will give the Fed the leeway to hold off on hiking rates if the European situation with Italy escalates. 

Pending Home Sales fell 13% in April, according to NAR. The supply / demand imbalance remains the story: Lawrence Yun, NAR chief economist, says the housing market this spring is hindered because of the severe housing shortages in much of the country. “Pending sales slipped in April and continued to stay within the same narrow range with little signs of breaking out,” he said. “Feedback from Realtors®, as well as the underlying sales data, reveal that the demand for buying a home is very robust. Listings are typically going under contract in under a month1, and instances of multiple offers are increasingly common and pushing prices higher.”

Initial Jobless Claims fell to 221,000 last week. We are still at exceptionally low levels. 

Mortgage rates fell 10 basis points last week, and this is even before the huge bond market rally on Tuesday. 

Deutsche Bank was put on the troubled bank list last year. This was obviously a big impetus behind its decision to reduce its US footprint. The German regulators have been on top of the bank as well. With credit default spreads widening in the Euro banking market, expect to see the European Central Bank tread extremely cautiously with policy normalization, and for the Fed to adopt a wait and see attitude after hiking in June. Separately, if Deutsche Bank decides to exit the US entirely, wouldn't it be wild to see them spin off Bankers Trust? 

Job Cuts fell to 31,517 in May, according to outplacement firm Challenger, Gray, and Christmas. This is the seasonally slow period for job cuts, as most companies concentrate them in Jan-Feb time frame. The cuts are mainly coming in retail, although things are picking up in the financial sector. Regionally, they are concentrated in the Northeast, particularly NY and NJ. 

The Trump Administration is set to push for tariffs on European steel and aluminum. A German magazine said that Trump told French President Emannuel Macron that he wanted to "stick to his trade policy long enough until no Mercedes-Benz cars were cruising through New York." The deadline for negotiations is this Friday.

US regulators are set to sand off some of the harder edges on Dodd-Frank and the Volcker Rule. The biggest change requested from the industry is the rebuttable presumption that any position held for less than 60 days is considered a proprietary trade. Essentially, this is a "innocent until proven guilty" scenario. The Fed also intends to clarify the liquidity management exception, which is meant to distinguish between market-making and proprietary trading. At the end of the day, falling commissions and tightening bid/ask spreads have made market-making an unprofitable business for the most part anyway. I suspect investors and regulators are in for an unpleasant surprise the next time we have a crash and the only bids in the market are retail GTC orders. 

The number of underwater homes fell below 10% in the fourth quarter for the first time since the crisis. Torrid home price appreciation has cut the percentage down to 9.1%, or about 4.4 million homes. "For much of the country the Great Recession is an increasingly distant memory - the American economy is booming once again and markets are now shifting their gaze to future downturn risks," said Zillow senior economist Aaron Terrazas. "But scattered in neighborhoods across the country, the legacy of the mid-2000s housing bubble and bust lingers among the millions of Americans still underwater on their mortgages, trapped in their homes with no easy options to regain equity other than waiting.” The worst areas? Chicago, Virginia Beach, and Baltimore. 

Morning Report: The Fed maintains rates as expected

Vital Statistics:

			Last	Change
S&P futures			2622	-5.75
Eurostoxx index			385.94	-1.5
Oil (WTI)			67.7	-0.21
10 Year Government Bond Yield				2.94%
30 Year fixed rate mortgage				4.58%

Stocks are lower after the Fed maintained interest rates. Bonds and MBS are up. 

As expected, the Fed maintained its current Fed Funds target yesterday. The money quote: Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. The "symmetric" characterization of their inflation target (as opposed to treating the 2% target as a ceiling) gave markets some comfort that the Fed is going to continue its slow upward march in the Fed Funds rate as long as inflation remains around these levels. Bonds initially fell on the news and then rallied. 

The Fed Funds futures are pricing in a 100% chance of a tightening at the June meeting, and the December futures are pricing in one more tightening this year, with a smaller chance of 2. 

Job cuts fell in April after an unusually strong March, according to outplacement firm Challenger, Gray and Christmas. Retail has accounted for the largest share of job cuts this year, followed by health care. For the year, companies have announced around 175,000 job cuts, while announcing 210,000 job plans. C&G uses press releases to count job cuts and hirings, so it necessarily relate to the payroll numbers being put out tomorrow by BLS. 

Productivity rose 0.7% while unit labor costs rose 2.7% in the first quarter, according to BLS. Weak productivity growth has been an issue for a while and is one of the reasons why wage growth has seemed muted. Increases in standards of living are driven by increases in productivity. The increase in unit labor costs may be related to many of the minimum wage hikes we saw at the beginning of the year. Theoretically, the lower the productivity, the less room the Fed has to maneuver. 

Initial Jobless Claims rose slightly to 211,000 which is still close to 50 year lows. 

The service sector continues to expand, albeit at a slower pace than March according to the ISM Non-Manufacturing Index. The respondents echoed the same trade fears as the manufacturers did. Some snippets:

• “Economy is humming along. [Activity in] both residential and commercial construction [is] apparent. Agriculture sector seems to be moderating at these commodity price levels. The international trade situation appears to be shifting on a minute-by-minute basis, which has folks nervous.” (Finance & Insurance)
• "National shortage of Class-A drivers and the increased demand for logistics is resulting in an increase in the cost of goods." (Accommodation & Food Services)
• Construction activity continues to remain strong in the region, resulting in capacity issues and shortages of labor, materials and subcontractors.” (Public Administration)

Bill Gross thinks the upward move in interest rates is pretty much done, and he doesn't see much more of a move from here. “Supply from the Treasury is a factor in addition to what the Fed might do in terms of a mild, bearish tone for U.S. Treasury bonds,” Gross told Bloomberg TV. “I would expect the 10-year to basically meander around 2.80 to perhaps 3.10 or 3.15 for the balance of the year. It’s a hibernating bear market, which means the bear is awake but not really growling.”Of course Bill is talking his book a little, but he is probably right, with the caveat that inflation remains around the 2% level.

Beware of cult stocks once they lose favor with the Street. Tesla's conference call was supposedly a disaster last night, and Elon Musk decided to take questions from You Tube people instead of analysts who were interested in things like cash burn. Comparisons are being drawn to Enron's conference call in the early 00s when Jeff Skilling blew up at analysts which caused people to take a more critical look at the company. Don't forget TSLA bonds have been getting slammed, and that is toxic for a stock with negative cash flow trading over 4x revenues. 

Fannie Mae results are out. The company made $4.3 billion in the first quarter. 

Big fixed income money managers have not had much of an appetite for MBS as QE pushed down returns. That may be changing, as BlackRock and BNP Paribas are allocating more funds to the sector. One big advantage of MBS is liquidity. What does this mean for mortgage originators? Lower rates, at least at the margin. 

Morning Report: FOMC minutes show uncertainty over Trump

Vital Statistics:

	Last	Change
S&P Futures	2262.5	-2.0
Eurostoxx Index	365.1	-0.2
Oil (WTI)	5375.0	0.5
US dollar index	92.6	-0.4
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.18

Stocks are down small on no real news. Bonds are up on the FOMC minutes from yesterday. 

The private sector added 153,000 jobs in December, according to the ADP jobs report. This is below the 172,000 consensus figure. The Street is looking for 175,000 jobs in tomorrow's payroll report. As the labor market tightens, job growth should slow. 

Announced job cuts increased slightly in December, according to outplacement firm Challenger, Gray and Christmas. 

Initial Jobless Claims came in at 235k last week, which is the lowest level since 1973. People that have jobs are generally keeping them. 

Consumer comfort slipped last week, according to the Bloomberg Consumer Comfort Index.

The ISM Non-Manufacturing Index was flat in December, and came in above estimates. New Orders and pricing drove the increase, however employment fell. 

The FOMC minutes didn't reveal much from the December meeting, aside from the fact that the interest rate forecast was based on the assumption that we would see more fiscal stimulus out of Washington, either via an infrastructure build or a tax cut. If we don't get that, then the growth estimates, (and the assumed path of interest rate hikes) are probably too high. Note that Congress seems to be settling on repealing Obamacare as the first order of business. If so, that would probably poison the well for any sort of infrastructure spend and / or tax cuts. Which means interest rates should be heading downward, all things being equal. Bonds initially rallied on the minutes, gave back the gains, and then started rallying again this morning. Note that the Fed Funds futures are predicting two rate hikes next year, with a possibility of a third. 

Note that the Fed has been consistently high in its estimates for GDP growth. The chart below looks at the Fed's forecast for 2016 GDP growth at different points in time, starting with the June 2014 estimate. 

Part of the problem with the Fed's forecast has been that this recovery is different from the typical cyclical slowdown. In those, the issue is excess inventory, which causes companies to lay off employees. Once the excess inventory is liquidated and sufficient pent-up demand is created, the expansion begins. This time however the issue is bad debt from the bubble years, and that takes longer to work off. Instead of a V-shaped recession and recovery, we have more of a bathtub-shaped recovery. The effect of the bubble years also has a scarring effect on both consumers and business leaders (what Keynes called the animal spirits) which causes caution. That is why capital expenditures have been weak and why we are only building about 1.3 million new houses a year when we probably need 2 million a year. 

Holiday sales (at least for the bricks and mortar retailers) seem to be disappointing as same store sales come in. Kohl's and Macy's both warned this morning and are down double digit percentages. Macy's is cutting 10,000 jobs. Given that online is cannibalizing bricks and mortar, it is tough to draw too many conclusions from this, however it is probably helping bonds at the margin. We will get the government's estimate of retail sales next Friday. 

Mortgage Performance improved in the third quarter, according to the OCC. 94.8% of first lien mortgages were current and performing as of 9/30 compared to 93.9% last year. Foreclosure starts were down 25%.

Morning Report: The Fed stands pat

Vital Statistics:

	Last	Change
S&P Futures	2096.8	5.0
Eurostoxx Index	333.8	0.7
Oil (WTI)	45.5	0.1
US dollar index	87.8	0.0
10 Year Govt Bond Yield	1.82%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.64

Stocks are mixed this morning after the Fed maintained interest rates. Bonds and MBS are down.

The Fed maintained interest rates at current levels yesterday. The meat of the statement: The labor market continues to strengthen, household spending is improving while business spending remains a weak spot. Inflation is ticking up but remains below the target rate. Esther George and Loretta Mester dissented, wanting to hike at this meeting. Bonds rallied maybe a basis point on the statement. 

This morning the Bank of England said that it doesn't plan on cutting interest rates this year, which is causing a global sell-off in sovereign debt. 

Announced job cuts fell 31% to 30,740 according to outplacement firm Challenger Gray and Christmas. This report looks at press announcements of job cuts, which may or may not ever materialize. Regardless, it does make the case that companies are holding onto their workers. In fact, this was the lowest October since 1999. Job cuts were most in the computer industry (largely related to HP), while cuts in the energy patch are slowing down considerably from earlier this year. 

Initial Jobless Claims ticked up to 265k last week, which is still an extraordinarily low number. Separately, the Bloomberg Consumer Comfort Index ticked up.

The ISM Non-Manufacturing Index dropped to 54.8 from 57.1 in September. This means the service economy is growing, however growth is decelerating. Transportation and Construction is leading the charge, while mining and educational services are lagging.

Productivity broke out of its long slump with a 3.1% increase in the third quarter. Output increased 3.4% and unit labor costs increased 0.3%. Increasing productivity is good news as it means wages can increase without generating inflationary pressures. Productivity has been disappointing ever since the economy bottomed, however. 

Both Republicans and Democrats look back wistfully on the 50s and the 60s. These years were an economic glory time, where unemployment was extraordinarily low, jobs were plentiful and high paying, and a single income was sufficient to support a family. The Third Quarter of the 20th Century basically began with the end of the Korean War and concluded with the oil shocks of the early 70s. Both parties want to bring back those times. Is that realistic? Probably not. The postwar decades were an extraordinary period where the US had no international competition, and not only had to satisfy its own demand, it had to satisfy the demand of Europe and Asia. The US earned what economists call "economic rents" and they were split between organized labor and government. By the late 70s, Europe was back on its feet and both old and new competitors were emerging from Asia. These economic rents were competed away (as they inevitably are). While this was good news for consumers and stockholders, it was bad news for union workers in general. Anyone who wants to bring back the salad days of the 50s and 60s needs to come up with a plan to get Angela Merkel to invade Poland. Donald Trump's vision of pre-free trade America won't get you there. Neither will the left's vision of an "smart" paternalistic regulatory state and 90%+ marginal tax rates. 

Morning Report: Dismal economic numbers this morning

Vital Statistics:

	Last	Change	Percent
S&P Futures	1896.6	-11.9	-0.62%
Eurostoxx Index	2882.8	-13.8	-0.48%
Oil (WTI)	32.15	-0.1	-0.40%
LIBOR	0.619	0.001	0.10%
US Dollar Index (DXY)	96.44	-0.850	-0.87%
10 Year Govt Bond Yield	1.87%	-0.02%
Current Coupon Ginnie Mae TBA	105.3
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.69

Stocks are lower this morning after we got some disappointing economic data. Bonds and MBS are up small.

Dismal economic numbers all around this morning

Productivity fell 3% in the fourth quarter and unit labor costs rose 4.5%. This is a recipe for falling profits in 2016. Given the tepid GDP growth being forecast for next year (sub 2%), companies will focus most on cost-cutting. Given the excess capacity in the manufacturing economy, companies have been reluctant to spend on capital expenditures, which has depressed productivity. Definitely not a recipe for releasing the animal spirits, although if builders start to address the tight supply, it will provide a good boost for the economy. 

Factory orders fell 2.9% in December, which was below the Street estimate. November's numbers were revised downward as well. 

Durable Goods orders fell 5% in December as well. Capital Goods orders (a proxy for capital expenditures by business) fell by 5%. This directly relates to the lousy productivity numbers above. 

Announced job cuts increased 41.6%, to over 75,000 according to outplacement firm Challenger and Gray. Most of the cuts are coming in retail and energy.  

Initial Jobless Claims rose 285k last week. 

The Bloomberg Consumer Comfort Index fell from 44.6 to 44.2 last week. 

Don't underestimate the Fed, which is the message from major strategists. Goldman Sachs Chief Economist Jan Hatzius is calling for a 3% 10 year by the end of the year. 

On the other hand, mortgage REIT American Capital Agency is calling for the Fed to abandon its "tightening bias" by the end of 2016. They see a hard landing in China, continued weakness in emerging markets, and undervalued Treasuries versus other benchmark sovereigns. 

In a testament to the change occurring in the financial markets, lenders like Quicken and SoFi will be advertising during the Super Bowl this year. 

Both Republicans and Democrats agree the economy is lousy, and both sides are going back to their boilerplate explanations. Democrats blame Wall Street and the rich, while Republicans blame government. The funny thing is that the "Wall Street" they rail against hasn't existed for almost 10 years.

Morning Report: Sandynomics

Vital Statistics:

	Last	Change	Percent
S&P Futures	1409.0	2.2	0.16%
Eurostoxx Index	2523.4	19.8	0.79%
Oil (WTI)	86.5	0.3	0.30%
LIBOR	0.313	0.000	0.00%
US Dollar Index (DXY)	79.9	-0.015	-0.02%
10 Year Govt Bond Yield	1.71%	0.02%
RPX Composite Real Estate Index	194.1	-0.3

Markets are up slightly as we recover from Sandy.  Transportation into NYC is still spotty, so expect lower-than-normal liquidity.  Bonds are down 1/2 a point and MBS are down small.

The US markets were closed Monday and Tuesday.  The last time the US markets were closed two consecutive days for a weather-related reason?  The Blizzard of 1888.

Can FEMA cover the losses from Sandy?  With the expected flood insurance claims, maybe not.

We have a slew of economic data this morning, starting with ADP Employment Change.  This is supposed to mirror the payroll survey the government puts out.  It showed nonfarm private employment rose 158k in Oct, while Sep was revised downward from 162k to 114k.  ADP has made some changes to their methodology, so this number will be hard to predict / volatile for the near term.

Challenger and Gray reported announced job cuts increased 41% in Oct, largely a result of lackluster earnings reports so far. C&G don't differentiate between domestic and overseas job cuts, so the impact on the US will be less.  The Markit Final PMI fell to a 37 month low.

Nonfarm productivity came in better than forecast, while unit labor costs unexpectedly fell. Initial Jobless claims came in at 363k.  Consumer Confidence, ISM, and construction spending will be released at 10:00.

Today is the first Thursday of the month, and that means retailers are reporting same store sales.  Generally, they are up across the board, which was pretty much to be expected.  Apparel did the best, while department and drug stores were generally down.

What will be the economic effect of Sandy? According to IHS Global, it could take 1.5% of 4Q GDP. But what about all of the construction workers that will be hired to rebuild?  More of a Q1 event, though overall, not enough to offset the balance sheet effects. Refer to the Broken Window Fallacy.  This will undoubtedly be motivation to prevent the fiscal cliff from occurring, although there seems to be a consensus that everything should be kicked down the road with the exception of the entirely symbolic tax cuts for incomes over 250k.

Morning Report - No Good Deed Goes Unpunished

Vital Statistics:

	Last	Change	Percent
S&P Futures	1413.5	8.2	0.58%
Eurostoxx Index	2500.1	9.5	0.38%
Oil (WTI)	86.63	0.9	1.05%
LIBOR	0.313	-0.001	-0.32%
US Dollar Index (DXY)	79.82	-0.091	-0.11%
10 Year Govt Bond Yield	1.84%	0.05%
RPX Composite Real Estate Index	194.1	-0.1

Markets are stronger this morning after a strong durable goods report and a good UK GDP number. Initial Jobless Claims came in at 369k and last week was revised upward to 392k.  Capital Goods orders were flat. We had a slew of decent earnings reports this morning, and Apple will report after the close. Bonds are getting clocked on the durable goods number, with the 10 year down a point and mortgages down 10 ticks.

The Chicago Fed National Activity Index came in flat, but the 3 month moving average is still negative, indicating the economy is growing below trend.

The FOMC statement yesterday was more or less a rehash of the prior statement.  Bond Traders who were looking for the Fed to add Treasuries to the QE mix were disappointed. The Fed noted that household spending has been advancing, while growth in fixed business investment has slowed.  Today's durable goods and capital goods reports bear that out.

The global slowdown is causing another round of job cuts.  This time, it is more than just Wall Street as Ford, Dow Chemical, Colgate Palmolive, AMD, and HP are all cutting staff.  The number of announced job cuts in the last 2 months is the highest since 2010.

The government is going after Bank of America for the sins of Countrywide. Needless to say, the consumer groups are delighted.  Lenders warn that credit will become even tighter. Certainly the litigation risk will get passed onto borrowers through higher rates and fees. Barney Frank believes the government should lay off JP Morgan for the sins of Bear, and claims that the government asked BOA to buy Merrill, but not Countrywide.

Whatever happened to the San Bernardino eminent domain idea?  This was the plan that involved the county taking performing underwater mortgages from the banks and forgiving principal. It appears the firestorm of criticism has caused the county to quietly table the idea.

Speaking of foreclosures, ABC News has a depressing photo essay of the foreclosure crisis.