Morning Report: ADP and BLS differ by huge margin

Vital Statistics:

			Last	Change
S&P futures			2642	-19
Eurostoxx index			374.5	-1.62
Oil (WTI)			63.07	-0.44
10 Year Government Bond Yield				2.80%
30 Year fixed rate mortgage				4.43%

Stocks are lower after Trump announced more tariffs against China. Bonds and MBS are flat.

Jobs report data dump:

• Payrolls up 103,000 (below expectations) 
• Unemployment rate 4.1% (above expectations)
• Labor Force Participation Rate 62.9% (increase of 0.1%)
• Average Hourly Earnings up 0.3% / 2.7% (in line with expectations)

Another month where the ADP number (increase of 241k) and the BLS number (increase of 103k) were a mile apart. Weather may have played a part in the low payrolls number, as the Midwest and East Coast were hit by a number of snowstorms that knocked out power early in the month. Construction employment fell, which kind of supports that theory. Wage inflation remains in check for the most part. The employment-population ratio was flat at 60.4%. Overall, a disappointing report, but the weather makes me want to put an asterisk next to it. 

The NFIB reports that almost a third of small businesses raised wages to attract and / or retain employees last month, which was the highest percent since 2000.

Forget about the old picture of the Rust Belt - decaying small towns that peaked in the 1950s and crashed during the 1970s. Things have changed. When you think of Detroit, you now think of Quicken Loans, and places like Elkhart Indiana are unable to keep $90,000 SUVs in stock because the town is booming with factory workers making $68,000 on average. At full production, workers are making $90k, and foremen are making 6 figures. The unemployment rate is basically zero - a town of 50,000 people has 9.500 unfilled job openings. Despite what some economists think about employers having market power and exhibiting monopsonist behavior (hard to believe dozens of employers in a single locality could collude), the laws of supply and demand do in fact apply to the labor market.

CFPB Acting Director Mick Mulvaney responded to Elizabeth Warren's letter that posed about 100 questions about how the agency is being run. Suffice it to say, she believes the agency isn't being aggressive enough. Mulvaney's response was basically to say that he doesn't have to respond, and doesn't intend to. “When I served on the House Committee on Financial Services as a Member of Congress, I was frequently frustrated with what I perceived to be a lack of responsiveness, transparency and accountability at the Bureau,” Mulvaney wrote. “I encourage you to consider the possibility that the frustration you are experiencing now, and that which I had a few years back, are both inevitable consequences of the fact that [the Dodd-Frank Act] insulates the Bureau from virtually any accountability.” The saga continues..

Donald Trump announced plans for another $100 billion in tariffs against China last night, and China responded with plans to retaliate. As of now, this is still in the trash-talking phase. Larry Kudlow says negotiations haven't even begun yet.

Treasury has issued a set of recommendations for modernizing the Community Reinvestment Act. Probably the biggest change would be to move the focus from where bricks and mortar branches are to where the banks actually lend. This would bring the law up to date with the concept of less branches and more online banking. The other recommendation is to bring in more standardization and more certainty into what the government is looking for in examinations. In other words, make the law less arbitrary.

Morning Report: Janet Yellen heads to the Hill

Vital Statistics:

	Last	Change
S&P Futures	2327.0	0.8
Eurostoxx Index	369.9	-0.2
Oil (WTI)	53.2	0.3
US dollar index	91.0	-0.2
10 Year Govt Bond Yield	2.43%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.06

Stocks are flat this morning after the producer price index comes in a little hotter than expected. Bonds and MBS are flat.

As expected, Steve Mnuchin was confirmed by the Senate to be the new Treasury Secretary. 

The Producer Price Index (which measures inflation at the wholesale level) came in at 0.6% in January, higher than the 0.3% consensus estimate. On a year-over-year basis, it is up 1.6%. The core rate, which strips out the volatile energy and food components, was up 0.2% and is up 1.6% YOY. Inflation remains under control, and won't really accelerate until we see wage growth. 

Despite the early missteps of the Trump administration, small business remains optimistic about the future, according to the NFIB. Small business added on average .15 workers in January, the highest reading in two years, and historically a very high number. 53% reported trying to hire workers and 47% were unable to find qualified candidates. 

Janet Yellen begins her two-day Humphrey-Hawkins testimony to Congress. There probably won't be much in the way of market-moving headlines, as I suspect the focus will be on deregulation and changes to Dodd-Frank. Any references to monetary policy should pretty much echo the Feb 1 FOMC statement. 

PIMCO is warning investors to be prepared if the Fed makes a mistake by tightening too fast. Historically central banks have moved a little too quickly trying to bring back rates from the zero bound (or close to it). In fact, the Bank of Japan has tried twice since their 1989 crash to get off the zero bound and has had to reverse course each time. The markets are currently forecasting a 30% chance of a Fed hike at their March meeting. The risk isn't so much that the current board of governors will move to fast - it is that Trump nominates hawks. That said, no politician likes a hawkish central bank except on the campaign trail, so that fear could be overblown. 

Richmond Federal Reserve Bank President Jeffrey Lacker (nonvoting) said the markets are underestimating the pace of Fed rate hikes this year. ""Rates need to rise more briskly than markets now seem to expect. The elevated uncertainty now surrounding fiscal policy, particularly the potential for substantial fiscal stimulus, suggests that our next increase should come sooner rather than later in order to reduce the risks associated with having to raise rates more rapidly later on." The way things are looking in DC, it seems pretty unlikely we are going to see any sort of cooperation on anything, least of all a tax cut. 

It bears repeating that interest rate cycles are long. Coming out of the Great Depression, long term Treasury rates stayed below 3% from 1934 to 1956. Below is a chart going back almost 100 years. Long term rates are pretty much around the levels we saw in the 1940s. Note the uptick in interest rates around 1932. That was the Fed tightening that pushed the economy over the edge during the Great Depression. The Fed didn't make the same mistake this time around, which is probably the biggest reason why the Great Recession didn't become the Great Depression II. Ironically, it took Ben Bernanke to officially admit that the Fed screwed up in the 30s. 

Completed foreclosures fell 40% year-over-year in December to 21,000. The foreclosure inventory is down 30%. The seriously delinquent rate is 2,6%, which is the lowest since June 2007. Foreclosures remain concentrated in the judicial states of NY and NJ. The rest of the country has pretty much worked through their foreclosure inventory. 

Real estate agents are optimistic for 2017, according to NAR. Changes in the FHA rules for condos is helping. 

Regulators put the kibosh on a strategy by JP Morgan and Redwood to help ease the path for private label securitizations. The idea was for JP Morgan to create a junior structure which contained the riskiest mortgages, sell off that piece to Redwood, and to retain the senior tranches. The hope was that this would reduce the amount of capital JPM would be required to keep against the mortgages. The OCC rejected the deal. 

Morning Report: Jamie Dimon on Housing

Vital Statistics:

	Last	Change	Percent
S&P Futures	1370.0	-8.2	-0.59%
Eurostoxx Index	2460.4	-13.1	-0.53%
Oil (WTI)	84.97	-0.6	-0.70%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	81.2	0.166	0.20%
10 Year Govt Bond Yield	1.59%	-0.01%
RPX Composite Real Estate Index	192.8	0.3

Markets are weaker this morning on Greek worries and a negative earnings report out of Weatherford. Bonds are up 1/2 a point and MBS are flat.

The NFIB Small Business Optimism index gained .3 points.  Uncertainty reached a record high, although this is understandable given it was an October before an election. CAPEX remains in maintenance mode, and hiring is absolutely flat. Generally it was a glum report.

Now that we have the election behind us, we can pretty much safely say that it is safer to be more constructive on Treasuries.  The Fed will continue to do what it does, and taxes are going up at the end of the year.  Combine that with the fact that Obama's re-election is a negative for energy and the financials, and we could be facing a weak Q113 as well.

But is there a bright spot?  Ah yes, housing.  Jamie Dimon has some optimistic comments regarding housing in the WSJ.  He basically cites the same things I have been talking about - household formation, affordability and inventory.  He makes the statement that housing isn't going to recover in the absence of a strong economy, which I am not so sure I agree with.  I think the low household formation numbers of the last 6 years are artificially depressed due to a lousy economy and have created pent-up demand.  Eventually, people get married, move out of Mom and Dad's place, and boot out the roommates.  In other words, housing can improve in spite of the economy.

Not only that, but think about this:  As part of obamacare, obama instituted a 3.8% surtax on investment income for people making over $250k.  In a tight rental market, landlords will undoubtedly attempt to pass that cost on to renters, making the rent vs buy decision even more of a no-brainer.  Credit availability remains a problem, though as Dimon notes.

Wapo notes that the REO discount is starting to disappear.

AIG is looking to expand its balance sheet in the mortgage business.