Morning Report: Wage inflation is beginning to creep up

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 the jobs report. Bonds and MBS are down

Jobs report data dump:

• Nonfarm payrolls + 151k vs 190k expected
• Unemployment rate 4.9%
• Average Weekly Hours 34.6
• Average Hourly Earnings up 2.5%
• Labor force participation rate

Overall a good report, Payrolls are disappointing, but the rest is strong. We are starting to see the beginning of wage inflation with average hourly earnings up 2.5%. December's number was revised upward from 2.5% to 2.7%. Stocks and bonds are down as this report will keep pressure on the Fed to maintain its posture of normalizing rates. The 2-year yield is higher by 4 basis points.

Higher wage inflation coupled with no inflation equates to lower profit margins. Ironically, this is the sort of "middle class economy" that politicians are promising to bring back. Good for workers, not so much for investors. 

The rise in the dollar and the corresponding fall in commodity prices is wreaking havoc on other economies though. Citi is saying fear oilmageddon. This will be felt not only in developing economies like Russia and Brazil, but also developed economies like Canada and Norway. Norway's "economic miracle" may have simply been a massive leveraged bet on oil and real estate. 

Obama proposed slapping a $10 per barrel tax on oil. Obviously that is going nowhere..

1 in 3 houses are still bought with cash, according to CoreLogic. This is a drop of 3 percentage points from a year ago. 

Morning Report: personal incomes and personal spending rises

Vital Statistics:

	Last	Change	Percent
S&P Futures	2097.1	-1.3	-0.06%
Eurostoxx Index	3636.8	36.2	1.00%
Oil (WTI)	46.16	-1.0	-2.04%
LIBOR	0.309	0.009	2.83%
US Dollar Index (DXY)	97.49	0.149	0.15%
10 Year Govt Bond Yield	2.20%	0.02%
Current Coupon Ginnie Mae TBA	104.5	0.5
Current Coupon Fannie Mae TBA	103.9	0.5
BankRate 30 Year Fixed Rate Mortgage	3.9

Markets are lower this morning after Chinese and Greek stocks fell overnight. Bonds and MBS are down small.

Personal Incomes rose 0.4% in June, beating the 0.3% street forecast. Personal spending rose 0.2%, in line with estimates. May's blockbuster 0.9% increase was revised downward to 0.7%. The PCE Deflator (the inflation measure preferred by the Fed) rose 1.3%, still well below their 2% target rate. 

Auto sales will be coming in drip-by-drip during the day. Ford reported 5% increase in light vehicle sales, better than the 1.8% estimate. Auto sales have been doing well as of late as the average age of a car on the road in the US has hit 11.4 years, which is a record. The next big "tell" on spending will be the back-to-school shopping season, which is right around the corner. 

Obama is set to unveil new emissions limits for utilities today. Supposedly they go farther than earlier proposals. Will undoubtedly raise prices and slow the migration of manufacturing back to the US. Note industry and states aren't taking this lying down. Cheap energy is the US offset to cheap labor overseas. Note that coal miner Alpha Natural Resources filed for Ch. 11 bankruptcy this morning..

The ISM July Manufacturing Index fell to 52.7 in July. Production-related indicators rose, however employment and exports fell. 

Construction spending rose 0.1% in June, much lower than expectations, however May was revised upward from 0.8% to 1.8%. Residential construction is up 0.4% month-over-month and 13% year-over-year. 

We will get the all-important jobs report on Friday. The Fed will get one more jobs report before the September FOMC meeting. The Street has handicapped the chance of a hike as a coin toss. The stock market remains sanguine about rate hikes - the VIX (a measure of fear in the marketplace) is bouncing along the bottom. There is an old market saw: "VIX is high, time to buy. VIX is low, time to go." There is a lot of complacency with stocks right now. Below is a chart of the VIX over time. It hit 80 during the financial crisis. Given the short shelf life of traders (by the time you are 40, you are a senior citizen), there is an entire generation of traders who have never been through a tightening cycle. This could get interesting. 

Note that Blackrock is forecasting a 5% - 10% correction when the Fed starts raising rates. 

Morning Report - Home price appreciation is decelerating

Markets are higher this morning after the Chinese stock market posted an impressive turn-around and rallied 5.5% overnight on hopes the government would do more to support stock prices. Bonds and MBS are down.

Greece's bailout expires tonight, and they are preparing for life post-bailout. The government has scheduled a referendum for 7/5 to accept or reject the austerity. Mohammed El-Arian lays out the path forward.

After the Greek situation gets resolved, attention will turn to the melt-down in China. Chinese stocks entered bear market territory (notwithstanding yesterday's humongous rally) and a lot of this rally is being supported by dumb money - margined retail money. People are looking to the government to do something to support the markets, and it feels a lot like the Japanese market did in the 90s, where the Ministry of Finance would call the banks during the lunch break and basically tell them to tear up their sell tickets for the day.

House prices increased 4.9% year over year in April, according to Case-Shiller. Home price appreciation is decelerating as wages fail to keep up with house prices.

Consumer confidence rose to 101.4 in June, according to the University of Michigan.

Obama just increased the cost of labor by demanding that anyone who earns just less than $1,000 a week be eligible for overtime, whether they are managerial or not. The new rules will take effect in 2016. IMO, this will only accelerate the replacement of technology for labor and the Uber-ization of the economy, but I suspect Obama isn't thinking about that. He is focused on whipping up the base, which is lukewarm with Hillary. With employment costs already soaring from regulatory mandates, I don't see how this helps overall employment levels. I suspect this is a variation of the French mentality that limiting hours will somehow encourage more hiring. It never ceases to amaze me that the left is completely comfortable with the concept of raising the price of gasoline and cigarettes via excise taxes in order discourage consumption, but yet they somehow imagine the laws of supply and demand are suspended in the labor markets.