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: Goldilocks jobs report and the FOMC minutes

Vital Statistics:

			Last	Change
S&P futures			2740	2
Eurostoxx index			381.23	-0.36
Oil (WTI)			42.31	-0.63
10 Year Government Bond Yield				2.82%
30 Year fixed rate mortgage				4.52%

Stocks are flattish this morning as a good jobs report offsets the new tariffs that went into effect this morning. Bonds and MBS are up.

Jobs report data dump:

• Payrolls up 213,000 (street was looking for 190,000)
• Unemployment rate 4% (.2% increase, street was looking for 3.8%)
• Labor force participation rate 62.9% (.2% increase)
• Average hourly earnings +.2% MOM / 2.7% YOY (in line with expectations)

Overall, a good report - strength in payrolls, and an increase in the labor force participation rate. The labor force increased by 600k, where the number of unemployed increased 500k and the number of employed increased 100k. Of those 500k added to the ranks of the unemployed, 200k were re-entrants to the labor force. The achilles heel (at least as far as those looking for wage growth) has been the reservoir of the long-term unemployed. This will help ease some of the labor shortage, which has been a constraint on growth. It will also raise the non-inflationary growth rate for the economy overall, which is kind of like a speed limit. For the Fed, this is a bit of a Goldilocks report - it gives them the breathing room to lift rates gradually which limits the risk of a recession. 

The FOMC minutes didn't really reveal much new information. Most pointed to the strong labor market and cited several statistics (JOLTS, unemployment rate, regional Fed surveys) to point to a tight labor market. "Several" members (i.e. a minority) thought that there was still some slack in the market as the long term unemployed are re-entering the labor market. Note this morning's jobs report bears that out. The members also discussed the slope of the yield curve, and whether the flattening was telling them anything. Interestingly, only "some" participants thought that the Fed's asset purchase program (i.e. QE) was affecting the shape of the yield curve, and therefore distorting the information sent from it. Kind of begs the question - if QE didn't affect the shape of the yield curve, then what was the point? Or even more importantly, why do they still have $4.5 trillion worth of bonds on the balance sheet? 

The Fed also thought about the possibility of a trade war and how that would end up slowing down the economy. They also thought that they might have to raise the Fed funds rate further than they had anticipated earlier: "With regard to the medium-term outlook for monetary policy, participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer run level by 2019 or 2020."

The Fed Funds futures turned slightly more hawkish on the minutes, with the probability of a Sep hike increasing from 75% to 80% and the chance of a Sep and Dec hike hitting 53%. 

In other economic news, the trade deficit fell to the lowest level in 18 months. Not sure how much of that is due to tariffs already in place. 

Tariffs (especially lumber) are wreaking havoc on the entry-level new housing market. Builders generally have to purchase things like land and materials up front before they build and get paid for the construction. When materials prices are artificially supported by tariffs, that increases their risks, and makes them pull back. 

Morning Report: Jobs report misses, and rates fall

Vital Statistics:

	Last	Change
S&P Futures	2434.3	4.8
Eurostoxx Index	394.3	2.6
Oil (WTI)	47.4	-1.0
US dollar index	88.5
10 Year Govt Bond Yield	2.16%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.25
30 Year Fixed Rate Mortgage	3.94

Stocks are up this morning despite a miss on the jobs report. Bonds and MBS are up.

Jobs report data dump:

• Nonfarm payrolls up 138k
• Unemployment rate 4.3%
• Employment to population ratio 60%
• Labor force participation rate 62.7%
• Average hourly earnings up 2.5% YOY
• Average workweek 34.4 hours

The payroll number was a big miss from the 185k expectation, and differs wildly from the ADP payroll number yesterday of 253k. Yet another instance where the ADP number and the official BLS number aren't even close to each other. Yes, the ADP number is meant to track the final revised BLS number, so it is possible that the BLS payroll number gets revised upward in the next two months. The labor force participation rate fell to 62.7% from 62.9% which was a disappointment as well. The unemployment rate fell to 4.3%, which is a 16 year low. The labor force shrunk by 430k people, while the number of people employed fell by 233k. The overall population increased by 180k. The two numbers the Fed pays the most attention to (employment / population ratio and hourly earnings) are certainly not pointing to any sort of inflation acceleration. 

Despite the payroll number, the Fed Funds futures increased their probability of a June hike to 93%. The 10 year continues to rally, and we are at the lowest yields since early November. The Trump reflation trade continues to deflate, at least as far as bonds are concerned. 

Construction spending continued its zigzag pattern, falling 1.4% MOM but increasing 6.7% YOY. Residential construction fell on a MOM basis but is up 16% YOY. Public residential construction fell. 

The ISM Manufacturing Index ticked up last month, led by increases in new orders, production, and employment. The prices index fell by a lot, however which again shows the lack of inflationary pressures in the supply chain. The current levels so far in the PMI index correlates with a historical GDP growth rate of around 4%. While manufacturing isn't the driver of the economy it used to be, it still matters. 

Announced job cuts at Ford pushed up the Challenger job cuts number, but otherwise job cuts are largely small. 

Donald Trump announced he will pull the US out of the Paris Accord yesterday. This will take years, so in the meantime expect no effects on oil prices or the economy. 

Investment bank Moelis, along with Blackstone and Paulson fund management have reportedly put out a detailed blueprint to bring the GSEs out from under government control. Treasury Secretary Mnuchin as well as the MBA are cool to the idea, because existing stockholders will benefit, when in reality they would have been wiped out back when the GSEs went under conservatorship. 

Home sizes are shrinking for the first time since 2009. This is mainly due to a change in the hombuilder mix. Post-crisis, the only segment of the homebuilding market that was working was the luxury end. Now, starter homes are becoming the focus, which is dragging average sizes lower. Home sizes are still larger than the bubble peaks were. 

Small business lending fell in April. 

Morning Report: Decent Jobs Report

Vital Statistics:

	Last	Change
S&P Futures	2266.0	2.0
Eurostoxx Index	365.3	-0.4
Oil (WTI)	54.2	0.4
US dollar index	92.6	0.6
10 Year Govt Bond Yield	2.40%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.11

Stocks are up slightly after the jobs report. Bonds and MBS are down.

Jobs report data dump:

• Nonfarm payrolls increased 156,000
• November payrolls revised up to 204,000
• Unemployment rate 4.7%
• Labor force participation rate 62.7%
• Average hourly earnings up 0.4% (up 2.9% annualized)

Overall, a good report. The payrolls number was a disappointment, however we did see an increase in the labor force participation rate and an increase in average hourly earnings. The employment to population ratio was steady at 59.7%. The job growth was primarily in health care and social assistance. Retail gained, as well as transportation. Finance grew as well. 

The focus for markets in on wage growth, as that is going to be the big determinant of Fed policy. I have plotted average hourly earnings over the past 10 years. You can see that the slope of the blue line (wage inflation) has almost come back to pre-crisis levels. In fact, wage inflation is the highest since 2009.  The gap between the two red lines represents the damage done by the Great Recession. The bigger question is whether employees get their raises in the form of higher benefit costs or whether it shows up in their paychecks. That will depend (in part) on whether the young Millennials get jobs, as they will help the risk pool which should (all things being equal) help lower health insurance costs for everyone else. Universities are reporting lower enrollments, which is a tell that Millennials are finding jobs. Note that sentiment indicators show that Millennials are more bearish on the economy than most, though this could be explained by partisanship.

Bonds sold off slightly on the report, with the 10-year reaching 2.4% before dropping back down. We have had some hawkish Fed-speak with Loretta Mester suggesting more than 3 hikes might be necessary and Williams saying 3 hikes would be reasonable. Remember, just because the Fed Funds rate increases, it doesn't automatically follow that long term rate (which determine mortgage rates) will also increase. The last few tightening cycles have seen a flattening of the yield curve.  

Despite the gloom for department stores and the holiday shopping season, online retailers reported an 11% increase in sales over the holiday period. We'll have to wait until we get retail sales to see how the season actually went. 

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The trade gap widened in December, while factory orders fell 2.4% in November.