Morning Report: Decent jobs report

Vital Statistics:

			Last	Change
S&P futures			2829.25	1.5
Eurostoxx index			386.66	-3.19
Oil (WTI)			37.32	-0.34
10 Year Government Bond Yield				2.97%
30 Year fixed rate mortgage				4.57%

Stocks are higher this morning on fears of an escalation in the trade war. Bonds and MBS are up small as markets continue to digest moves from the Bank of England and the Fed.

The Fed maintained current policy and didn't reveal anything new in the statement. Bonds yawned at the decision. Trade was not mentioned in the statement. The Fed Fund futures are now sitting at a 94% chance of a Sep hike and a 70% chance of a Sep and Dec hike. 

The jobs report was decent - payrolls disappointed but the revisions in May and June more than made up for it. Jobs report data dump:

• Payrolls up 157,000 (Street was looking for 190,000)
• Prior two month revision + 57,000
• Labor force participation rate 62.9%
• Unemployment rate 3.9%
• Average hourly earnings up .3% MOM / 2.7% YOY (in line with expectations)

The employment population ratio ticked up to 60.4%. While this number has been steadily rising, the labor force participation ratio remains stuck just below the 70% level. 

Initial Jobless Claims were flat last week at 218,000, while announced job cuts fell to 27,122. 

Wells will pay a $2 billion penalty for misrepresentations on loans made during the bubble years. This is after they paid a $1 billion penalty for auto loan issues. 

The Atlanta's Fed's GDP tracker is now looking for 5% growth in Q3. This model tends to give volatile results early in the quarter, but that is a pretty amazing number. Seems like every business in the US is firing on all cylinders except for mortgage banking.

The Trump Administration is looking into the idea of indexing capital gains to inflation. This idea has been around for decades, and it is based on the idea that asset prices will rise over time, some of which is due to simple inflation. If prices overall rise 5%, and your house value increases 5% as well, are you really better off? You probably aren't, and yet you are paying taxes as if you are. It gets brutal in places like California, where if you move, the equity you built just gets rolled into buying an even more expensive home than the one you left. The tax bill makes that a difficult trade. The Admin is looking to see if they can make the change directly in the tax code, bypassing Congress. So far, it seems like the idea has little traction in Congress. Democrats will be uniformly opposed and Republicans don't seem all that anxious to get whacked in the press for something that nobody seems to be asking for in the first place.

Speaking of politics, we are in opposite world, where the Koch brothers are cozying up with Democrats and Richard Trumka of the AFL-CIO is supporting Trump's trade war. What does this mean? It means some investors are moving to cash ahead of midterm elections. 

Morning Report: Empire State outlook declines

Vital Statistics:

			Last	Change
S&P futures			2802	-1
Eurostoxx index			383.92	-1.14
Oil (WTI)			69.81	-1.2
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.50%

Markets are flattish as earnings season gets into full swing. Bonds and MBS are flat.

Oil is dropping after US Treasury Secretary Steve Mnuchin said the US could waive some Iranian oil sanctions. 

Bank of America reported decent earnings this morning. This is a big week for earnings, with about 200 major companies reporting. The early part of reporting season is generally dominated by the banks. 

Jerome Powell will testify in front of Congress on Tuesday and Wednesday. Generally these events don't yield much in the way of useful info - they are mainly for the benefit of politicians who want to draw attention to some issue that may or may not relate to monetary policy. Expect a lot of questions regarding how a trade war and income inequality will affect growth from Democrats, and expect a lot of questions regarding regulation from Republicans. The prepared remarks are here. 

Retail Sales rose 0.5% in June, which was in line with expectations. Ex-autos and gas they rose 0.3% while the control group was flat. May numbers were revised upward. The control group was below expectations, but with the May revisions offset that. Discretionary items (clothing, sporting goods, department stores) declined, which building materials and furnishings rose. 

Business Inventories rose 0.4% in May. The inventory-to-sales ratio is down to 1.34 from 1.39 last year. 

Business activity in New York State exhibited continued strength in June, according to the New York Fed's Empire State Manufacturing Survey. While the current conditions index exhibited strength, the outlook has slipped. The survey doesn't say whether this is being driven by a potential trade war or something else. Planned capital expenditures (a proxy for expansion plans) decreased. 

The Atlanta Fed took up their Q2 GDP estimate to 3.9%. Morgan Stanley warns that we are seeing a bit of a sugar rush in the economy courtesy of trade tensions. As companies worry about a potential trade war, they stockpile raw materials and other inputs. This gooses the inventory numbers which makes the current quarter look particularly strong. The problem is that you get a double whammy if the trade war materializes. Activity will drop, and that inventory will be liquidated, both of which will reduce GDP growth. Even if a trade war doesn't happen, uncertainty could cause companies to pull in their horns. FWIW, I am skeptical of the "uncertainty" argument. Regulatory "uncertainty" out of DC generally causes companies to be cautious. The rest of the clatter is just noise. Certainly investors (judging by the S&P 500) aren't worried. 

One stat to watch: Corporate bond spreads. We are seeing a slight widening in some of the junkier investment grade debt. Baa spreads increased to 200 basis points from 165 in February. While spreads are still tight relative to historic levels, this is something to watch. Years of financial repression have given issuers the upper hand with regards to covenants and some of those chickens will come home to roost in the next recession. 

Morning Report: Tax and Fed Head day

Vital Statistics:

	Last	Change
S&P Futures	2573.8	-1.0
Eurostoxx Index	395.3	-1.4
Oil (WTI)	54.3	0.0
US dollar index	87.7	0.0
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.95

Stocks are flat after the Fed maintained rates and the Bank of England hiked them. Bonds and MBS are flat as well. 

As expected, the Fed maintained the current level of the Fed Funds rate and said its plan of tapering QE remained on track. Since there was no press conference or updated projections, there really wasn't much for the bond market to work with. The part that caught my eye was that the Fed saw risks to the economy as evenly balanced. Given the growth and the low unemployment rate the risks to the economy are probably to the high side. What is more likely? An uptick in inflation to 2 - 3% or a recession? 

Separately, the Atlanta Fed bumped up their estimate for Q4 GDP to 4.5%. That would work out to 3.1% growth for 2017. That said, hurricane effects didn't drag down Q3 all that much so we may not see that big of a rebound in Q4. This estimate is going to hinge on the holiday shopping season. 

Job cuts fell to 29,831 in October, the lowest in 20 years, according to outplacement firm Challenger, Gray, and Christmas. The health care sector had the biggest number of cuts. Separately, initial jobless claims fell to 229,000 last week. 

Perhaps an explanation of why we are starting to see wage growth: productivity rose to 3% in the third quarter. Lousy start / stop productivity growth has bedeviled the economy since 2008. Increases in productivity drive increases in real (non-inflationary) wages. Unit labor costs rose 0.5%. 

Donald Trump is expected to nominate Jerome Powell to run the Fed today. There are many that are disappointed that Yellen didn't get a second term, however Trump wants someone with private sector experience to run the Fed, after a string of academics. We probably won't see much difference between Powell and Yellen in terms of monetary policy (any differences would be so minor no one will notice) but there will be differences in regulatory approach. Janet Yellen was very much in the Obama mold of aggressive regulation. Powell is expected to be more balanced in his approach to the banks. 

The GOP is slated to release their tax reform bill today. There have been trial balloons galore floated, so nobody really knows what it will entail. The most likely change is a drop in the corporate tax rate (which may or may not be phased in and / or temporary), an increase in the standard deduction, and limitations on deductions for those that itemize. Some sacred cows are going to take a hit in this bill, and with zero expected Democratic votes, it will have a narrow path to approval. Here is what the latest handicapping has..

Donald Trump signed the Congressional Review Act override to the CFPB's arbitration rule. Eliminating the mandatory arbitration rule was always more about benefiting lawyers than consumers, and even the CFPB's own research showed that consumers get better compensation from arbitration than they do from class action suits (ever get an unexpected check in the mail for $1.37 after a class action suit you never heard of? The rest went to the legal fees). Small and medium sized financial firms will be the biggest beneficiaries of this rule. 

Morning Report: Strong jobs report

Vital Statistics:

	Last	Change
S&P Futures	2474.5	2.8
Eurostoxx Index	380.7	1.8
Oil (WTI)	48.9	-0.1
US dollar index	86.1	0.0
10 Year Govt Bond Yield	2.26%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.94

Stocks are higher this morning after the jobs report beat expectations. Bonds and MBS are down.

Jobs report data dump:

• Payrolls up 209,000
• Unemployment rate 4.3%
• Labor force participation rate 62.9%
• Average hourly earnings up 0.3% MOM / 2.5% YOY

Not a bad report. The Street was looking for 180,000 jobs, so the number was better than expected. Most of the job gains were in professional / business services, healthcare, and restaurants / bars. The two month revision was negligible. Wage growth remains sluggish, which is probably due to the huge shadow inventory of discouraged workers on the sidelines. 

Small business owners are the most optimistic in 10 years, according to Gallup. The biggest challenge to small business? Government. 

Wow. The Atlanta Fed is forecasting 4% GDP growth in Q3. The rest of the street is around 2.4%.