Morning Report: Jobs report disappoints, but the Fed may still hike in June

Vital Statistics:

	Last	Change	Percent
S&P Futures	2056.2	3.5	0.17%
Eurostoxx Index	2973.5	36.6	1.25%
Oil (WTI)	44.82	0.2	0.36%
LIBOR	0.63	-0.002	-0.35%
US Dollar Index (DXY)	94.02	0.134	0.14%
10 Year Govt Bond Yield	1.77%	-0.01%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.58

Markets are up small despite some bad data out of China overnight. Bonds and MBS are up small.

Jobs report data dump:

• Payrolls + 160k
• Unemployment rate 5%
• Average hourly earnings + 0.3% MOM / +2.5% YOY
• Labor force participation rate 62.8%
• Underemployment rate 9.7%

Overall not a great report. The Labor Force Participation rate fell back, which is bad news for the economy overall. Earnings are up, which is about the only bright spot on the report. Strategists are beginning to worry about a deceleration in the economy, or even a mild recession. Tough to see how the Fed raises rates in June.

The Labor Market Conditions Index improved to -.09 from -2.1 last month. This is a meta-index of several leading and lagging indicators. 

Despite the weakness in the economy, Bill Gross and Mohammed El Arian are warning investors not to discount the Fed. Their point: wage growth is the most important part of that jobs report, and they are going up. A June hike is not the most likely outcome, however it shouldn't be ruled out either. 

The Fed wants to see a bit of inflation, but the convoy system in Asia is preventing it. Like the Japanese, China is propping up unprofitable factories, which is contributing to a glut of aluminum, steel, and other industrial goods. We saw this happen in the 1930s, which triggered trade wars and exacerbated a global deflationary vortex. We are seeing a similar thing today, with the backlash against free trade, and nationalistic candidates in Europe and the US. 

The biggest internet lender, Lending Club, is down big pre-open after the CEO resigned over a loan sale. Apparently the loan sale didn't have anything to do with pricing or credit, but it did violate the company's internal procedures. The company is currently facing trouble funding its loans in the capital markets. The stock is down close to $5 a share after trading at $19.50 just under a year ago. 

This year has not been kind to the stocks of non-bank lenders / servicers - Nationstar, Ocwen, Stonegate, Walters all down badly this year. 

Wondering how your property taxes compare to others in the country? CoreLogic has worked it out for you. 

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 - Jobs report data dump

Vital Statistics:

	Last	Change	Percent
S&P Futures	2088.7	-3.5	-0.17%
Eurostoxx Index	3491.1	-18.9	-0.54%
Oil (WTI)	58.74	-0.4	-0.66%
LIBOR	0.281	0.002	0.82%
US Dollar Index (DXY)	95.91	-0.398	-0.41%
10 Year Govt Bond Yield	2.38%	-0.03%
Current Coupon Ginnie Mae TBA	100.6	-0.1
Current Coupon Fannie Mae TBA	99.45	0.2
BankRate 30 Year Fixed Rate Mortgage	4.08

Stocks are lower after Greece officially missed its payment to the IMF. Bonds and MBS are up small.

The week after the jobs report is usually data-light and this week is no exception. The only data that should matter is retail sales on Thursday. While the labor market seems to be improving, consumer spending is still lagging. Part of that is demographic, where you have a bunch of old rich people who probably bought their last TVs, toasters, etc and a bunch of young broke people. 

Bonds got rocked on Friday after the stronger than expected jobs report. 280,000 jobs were created in May, and the two prior months were revised upward from "dismal" to "not hideous." Average hourly earnings rose to $24.96, up 2.3% from last year. The unemployment rate ticked up to 5.5% as the labor force participation rate improved to 62.9%. It is looking like the first quarter weakness was indeed transitory, and weather-driven. It probably doesn't mean the Fed is moving in June, but September is definitely in play. 

The big question the Fed is grappling with is the ceiling on the labor force participation rate. If it is high, say 66% - 67%, then returning workers will keep a lid on wages, and the Fed will be able to let the economy run a bit longer. It also means the overall growth potential for the economy is higher. If the ceiling is low, say 64% - 65%, it means wage inflation will force the Fed's hand earlier, which means the "speed limit" of the economy is lower. Of course demographics explain some of the long term changes in the labor force participation rate, however many of the long-term unemployed want to (and need to) have a full-time job. Whether they can get meaningful jobs after being on the sidelines for multiple years is an open question. 

In spite of the huge sell-off in bonds over the past two months, the street is forecasting  a 2.5% 10 year yield for 2015. The Fed has been consistently over-optimistic on the economy in general, and the simple fact that the Fed funds rate is increasing does not necessarily mean long term rates are going to go up big. Take a look at the chart below: it is the 10 year bond yield minus the Fed Funds target rate. In the last tightening cycle (early 2004 to early 2006), the Fed Funds rate increased from 1% to 5.25% over the course of two years. During that same period, the 10 year bond yield increased from about 4.8% to 5.2%. The yield curve actually inverted towards the end of the cycle (which more or less broke the real estate bubble). In other words, the Fed could start hiking rates this year and we could see the 10 year go basically nowhere.