Morning Report: The economy added 21k jobs in November

Vital Statistics:

S&P futures4,59115.2
Oil (WTI)68.371.98
10 year government bond yield 1.46%
30 year fixed rate mortgage 3.32%

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

The economy added 210k jobs in November, which came in below the the Street estimate of 545,000. Since this is the headline number, it will be the focus, however the internals of the report are pretty good. The unemployment rate fell 0.3% to 4.2% while average hourly earnings rose 4.8% on a YOY basis.

The labor force participation rate rose to 61.8% while the employment-population ratio increased to 59.2%. Both numbers are still well below where they were pre-COVID, however. FWIW, there is a pretty big disconnect between the Establishment survey (which asks employers) and the Household survey (which talks to people). Employers reported an increase of 210k jobs while households showed an increase of 1.1 million.

Overall, it shows that the labor market is on the mend, and the increases in wages are no longer just being driven by technical factors. The Great Resignation continues as we saw a record 4.4 million people quit their jobs in September. Overall, the economy is making progress towards full employment, which gives the Fed the wiggle room policy-wise to attack inflation more aggressively.

Bonds sold off on the report, despite the miss on the payroll number. I think the household survey is telling the real story this month, not the establishment survey.

The ISM Services Report hit an all-time high last month, which is another data point that the economy is starting to re-accelerate. Business Activity and Employment were the big drivers of the increase. Interestingly prices are still rising, but the rate of growth is decelerating.

If you look at the statements from businesses, shortages of materials and labor continue to be a constraint, however demand remains strong.

Morning Report: Job cuts lowest since 1993

Vital Statistics:

S&P futures4,5138.2
Oil (WTI)64.92-0.58
10 year government bond yield 1.42%
30 year fixed rate mortgage 3.28%

Stocks are rebounding after yesterday’s sell-off. Bonds and MBS are up.

Initial Jobless Claims came in at 224k last week, which was up from 194k the week before. Last week’s print was a 50-year low, but it looks like it might have been a fluke.

Despite the falling 10-year rate, mortgage rates have not been falling much. In trader’s parlance, this means MBS spreads are widening. The current spread is about 70 basis points, which has blown out over the past couple of weeks, however it is around the average for 2021. FWIW, 2021 spreads were “tight,” compared to historical levels, which means that we should expect mortgage rates to fall grudgingly, and to rise easily going forward.

As a general rule, MBS prices tend to lag the moves in Treasuries, however there is more going on right now. The Fed is looking at accelerating its tapering process which means that demand for MBS is expected to fall faster than expected. Lower demand for TBAs = Lower Prices for TBAs = Higher Mortgage Rates.

The drop in commodity prices will probably give the Fed some wiggle room on how fast they need to raise rates, however the market’s perception is that the Fed is behind the curve. The drop in the 10-year rate doesn’t really make sense in this context, however IMO it is part of the global “risk-off” trade which is driven by the new COVID variant.

Announced job cuts fell to 14,875 last month, according to outplacement firm Challenger, Gray and Christmas. This was the lowest number since 1993. “With the Omicron variant emerging and the unknowns that come with its spread, coupled with the ongoing difficulty hiring and retaining workers, it’s no surprise job cuts are at record lows. Employers are spread thin, planning best- and worst-case scenarios in terms of COVID, while also contending with staff shortages and high demand,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

Morning Report: Jerome Powell says it is time to retire the term “transitory.”

Vital Statistics:

S&P futures4,62158.2
Oil (WTI)67.522.28
10 year government bond yield 1.48%
30 year fixed rate mortgage 3.27%

Stocks are higher this morning on no real news. Bonds and MBS are down.

Jerome Powell sounded hawkish at yesterday’s Senate Banking Committee testimony, saying it is time to retire the word “transitory” to describe inflation. The Fed is expected to make a decision regarding a faster tapering at the mid-December FOMC meeting, which will be largely determined by the severity of Omicron.

The Fed Funds futures increased the probability of further rate hikes, and are pricing in 3 hikes in 2022, with the first one expected at the June meeting.

The new conforming loan limits are out, with the new level at 647,200. The high balance limit rises to $970,800.

ADP estimated that there were 534,000 jobs added in November. This is exactly what the Street is looking for in Friday’s jobs report.

“The labor market recovery continued to power through its challenges last month,” said Nela Richardson, chief economist, ADP. “November’s job gains bring the three month average to 543,000 monthly jobs added, a modest uptick from the job pace earlier this year. Job gains have eclipsed 15 million since the recovery began, though 5 million jobs short of pre-pandemic levels. Service providers, which are more vulnerable to the pandemic, have dominated job gains this year. It’s too early to tell if the Omicron variant could potentially slow the jobs recovery in coming months.”

Mortgage applications fell 7.2% last week as purchases rose 5% and refis fell 15%. “Mortgage rates rose for the third week in a row, reducing the refinance incentive for many borrowers,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Over the past three weeks, rates are up 15 basis points and refinance activity has declined over 18 percent. Despite higher mortgage rates, purchase applications had a strong week, mostly driven by a 6 percent increase in conventional loan applications. Conventional loans tend to be larger than government loans, and this was evident in the average loan amount, which increased to $414,700 –the highest since February 2021. As home-price appreciation continues at a double-digit pace, buyers of newer, pricier homes continue to dominate purchase activity, while the share of first-time buyer activity remains depressed.”

The ISM Manufacturing Index came in at 61.1, an increase of 0.3 from October. “The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, with some indications of slight labor and supplier delivery improvement. All segments of the manufacturing economy are impacted by record-long raw materials and capital equipment lead times, continued shortages of critical lowest-tier materials, high commodity prices and difficulties in transporting products. Coronavirus pandemic-related global issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — continue to limit manufacturing growth potential. However, panel sentiment remains strongly optimistic, with 10 positive growth comments for every cautious comment. “

Morning Report: Omicron fears hits markets

Vital Statistics:

S&P futures4,621-222228.2
Oil (WTI)67.68-2.48
10 year government bond yield 1.43%
30 year fixed rate mortgage 3.30%

Stocks are lower this morning on COVID fears. Bonds and MBS are up.

Jerome Powell is scheduled to speak in front of the Senate Banking Committee this morning. Here are his prepared remarks. One sentence caught the market’s attention: “The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.” The market took this as bullish for bonds, which is why rates fell late yesterday.

The Fed Funds futures are getting a little more dovish compared to a week ago. The central tendency is now looking at 50 bps in hikes next year versus 75 a week ago.

Home prices rose 18.5% in the third quarter, according to the FHFA. This number will supposedly determine the new conforming limits for next year. I am hearing conflicting interpretations however. If you divide the Q321 index level by the Q320 index level, you get a 18.05% increase. This would put the new conforming loan limits at $647,200. If they use the headline number, then it would come in at $649,700. We should get the official numbers in a day or two.

“House price appreciation reached its highest historical level in the quarterly series,” said William Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “Compared to a year ago, annual gains have increased in every state and metro area. Real estate prices have risen exceptionally fast, but market momentum peaked in July as month-over month gains have moderated.”

Separately, the Case-Shiller Home Price Index rose 19.5%.

Consumer confidence slipped in November, according to the Conference Board. “Consumer confidence moderated in November, following a gain in October,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Expectations about short-term growth prospects ticked up, but job and income prospects ticked down. Concerns about rising prices—and, to a lesser degree, the Delta variant—were the primary drivers of the slight decline in confidence. Meanwhile, the proportion of consumers planning to purchase homes, automobiles, and major appliances over the next six months decreased. The Conference Board expects this to be a good holiday season for retailers and confidence levels suggest the economic expansion will continue into early 2022. However, both confidence and spending will likely face headwinds from rising prices and a potential resurgence of COVID-19 in the coming months.”

The pipeline for MSR sales is heavy, with a bunch of sellers trying to ring the register as servicing valuations improve ahead of an expected increase in rates. Both Rocket and United Wholesale made big bulk sales of servicing in the third quarter.

If the Omicron variant of COVID causes rates to fall, it will be good news for refis, but it will be awful for servicing valuations. We have seen this movie before: People pile into servicing ahead of an expected increase in rates, and then something like Brexit, COVID or Omicron causes rates to fall, not rise. Falling rates are bad for MSR valuations, it causes a double-whammy of lower modeled values and writedowns as MSRs are refinanced away.

Morning Report: Big week for data ahead

Vital Statistics:

S&P futures4,64348.2
Oil (WTI)72.484.48
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.36%

Stocks are rebounding today after getting smacked on Friday. Bonds and MBS are down.

Stocks were hit hard late last week on news about a new variant of COVID – Omicron. The moves were probably exaggerated given that many participants were taking Friday off, so we’ll see if this move has legs.

Black Friday sales were up 48% compared to last year’s depressed level. That said, they were below 2019. Lots of Black Friday sales make me wonder if demand is slipping. With all of the apparent shortages out there, I thought retailers would not need to cut prices to get business.

We have a big week for data. The most important numbers will probably be the FHFA House Price Index tomorrow, which will determine the conforming loan limits for 2022. The jobs report on Friday will be big, along with ISM data and construction spending. Jerome Powell also speaks tomorrow.

More Fed officials are comfortable with increasing the pace of tapering and raising rates more quickly. “Various participants noted that the (policy-setting) Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives,” the Fed said in the minutes.

Pending Home Sales rose 7.5% in October, according to NAR. “Motivated by fast-rising rents and the anticipated increase in mortgage rates, consumers that are on strong financial footing are signing contracts to purchase a home sooner rather than later,” said Lawrence Yun, NAR’s chief economist. “This solid buying is a testament to demand still being relatively high, as it is occurring during a time when inventory is still markedly low. The notable gain in October assures that total existing-home sales in 2021 will exceed 6 million, which will shape up to be the best performance in 15 years.” The hottest markets were Jacksonville, Tampa, Dallas and Nashville.

Morning Report: Inflation moderating?

Vital Statistics:

  Last Change
S&P futures 4,666 -21.2
Oil (WTI) 78.72 0.08
10 year government bond yield   1.68%
30 year fixed rate mortgage   3.31%

Stocks are lower this morning after some inflation data came in higher than expected. Bonds and MBS are down.


The second estimate for third quarter GDP was revised upward to 2.1%. The PCE price index was unchanged at 5.3%. Ex-food and energy, it rose 4.5%. The PCE price index is the Fed’s preferred measure of inflation, and it is obviously higher than their 2% target rate. Wages and salaries were revised upwards as well.


Personal incomes rebounded in October by 0.5% after falling 1% in September. Consumption rose 1.3%. The PCE inflation index rose 5%, and if you strip out food and energy rose 4.1%. Note that this is below the averages for the third quarter (which we saw in the GDP report). This is at least one indication that inflation is beginning to moderate.

Just one quick note on inflation – home price appreciation does get incorporated into the inflation data via rents and “owner’s equivalent rent” which is a proxy for homeowners. That said, it generally shows up with a 12 – 18 month lag, so the current inflation numbers have yet to capture the torrid price appreciation we have been seeing this year.

It is important to note that inflation is as much a psychological phenomenon as it is a monetary one. It is more than simply “too much money chasing too few goods.” It is people wanting to get ahead of demand as well. Say for example, if you heard COVID cases were rising and we might be heading towards another lockdown, would you stock up on TP? Of course you would. So would everyone else. That would create shortages and increase prices.

Workers seem to be in the driver’s seat for the first time since the 1970s. Automatic cost-of-living increases were built into union contracts, and even non-union workers began to expect annual cost-of-living wage increases. Depending on how long this worker shortage lasts, these things may become a feature of the landscape going forward. It will be hard for the Fed to hit a 2% inflation target if wages are rising 4% a year.

At any rate, even if commodity prices begin to fall, home price appreciation is going to start showing up in the numbers starting next year. While some of that is certainly not “real” inflation – your cost of living doesn’t increase just because your home value rises – consumers are going to focus on the headline number and demand wage increases going forward. Unless the supply chain issues magically disappear we have the pieces in place for a long-term secular increase in prices.


New Home Sales rose 0.4% MOM in October, but are 23% lower than they were a year ago. The median home price rose 18% to 407,700.

Morning Report: The bond market is adjusting to the Powell re-nomination

Vital Statistics:

S&P futures4,6791.2
Oil (WTI)77.720.08
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.31%

Stocks are flat this morning on no real news. Bonds and MBS are down.

The Treasury market is adjusting to the news of the Powell re-nomination apparently. Brainard was seen as more dovish, and therefore yields are adjusting to a more hawkish stance. The Fed Funds futures are now settling around a forecast of 3 rate hikes next year. Note that there is a global bond market sell-off as well, with yields in Germany and the UK rising big as well.

Demand for credit has returned to pre-pandemic levels, according to research from the New York Fed. Credit cards are leading the demand.

The Biden Admin will tap the strategic oil reserve in order to drive down prices. Several other countries will do the same thing. “The president stands ready to take additional action, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply as we exit the pandemic,” the White House said in a statement.

Morning Report: Fannie sees little changes to mortgage rates through 2023

Vital Statistics:

S&P futures4,70915.2
Oil (WTI)76.020.08
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.26%

Stocks are higher this morning on M&A news. Bonds and MBS are down small.

The upcoming week contains the Thanksgiving holiday, so volumes should be relatively light. Market are closed on Thursday, and Friday is an early close in the bond market. The big day for data will be Wednesday, when we get GDP, personal incomes and spending, and new home sales.

The Wall Street Journal is reporting that Jerome Powell will be re-nominated to run the Fed. Lael Brainard will be the Vice Chairman. The difference between the two is probably not of any issue to the markets – the big issue is inflation and whether the Fed has the stomach to raise rates. The left wanted Brainard who would supposedly be tougher on the banks and climate change. I wonder what the correlation is between the overnight reverse repo rate and the temperature of Gaia.

Existing home sales rose 0.8% in October, according to NAR. The median home price rose 13.1% to $353,900. Inventory remains tight, with only 2.4 months’ worth at the current sales pace. “Home sales remain resilient, despite low inventory and increasing affordability challenges,” said Lawrence Yun, NAR’s chief economist. “Inflationary pressures, such as fast-rising rents and increasing consumer prices, may have some prospective buyers seeking the protection of a fixed, consistent mortgage payment.”

Investors comprised 17% of all sales, and the first time homebuyer accounted for 29% of all transactions.

The Chicago Fed National Activity Index improved in October, after declining in September. This means the economy grew above trend during the month.

Fannie Mae is predicting that mortgage rates will rise to 3.5% by the end of 2023, which is not too far from where they are now.

“The Fed has taken pains to broadcast its tapering and rate hiking plans to avoid a repeat of the 2013 temper tantrum, when market expectations suddenly shifted regarding the long-run real rate, and for now both financial market and survey measures of long-term inflationary expectations remain mostly anchored,” Fannie Mae forecasters said. “Therefore, our baseline forecast is that these effects are largely ‘baked in,’ leading to only a modest drift upward in mortgage rates over the next few years.”

Note that the MBA sees rates heading much higher in the second half of 2022. Fannie Mae is forecasting that the Consumer Price Index could hit 7% or 8% in the back half of 2022 as all of the home price appreciation from the past 18 months begins to filter through to the CPI.

Morning Report: Home sales down 10%

Vital Statistics:

S&P futures4,690-10.2
Oil (WTI)76.35-2.63
10 year government bond yield 1.52%
30 year fixed rate mortgage 3.28%

Stocks are lower as parts of Europe re-enter lockdown mode. Bonds and MBS are up.

Home sales were down 6.2% MOM and 10.2% YOY, according to data from Re/Max. “We’re seeing the effects of a long, sustained run-up in prices and month-over-month home sales and the market may be moving past the days of immediate sales, multiple offers and bidding wars on virtually every property,” said Nick Bailey, president of RE/MAX, LLC. “That’s okay — the October dip in sales, especially after such a busy September, is a step toward a more balanced market and was somewhat overdue.”

Redfin predicts that we will have a more balanced housing market in 2022 as listings increase. The company expects mortgage rates to rise to 3.6%, and for new listings to hit a 10-year high. Rents are expected to increase 7% as well.

Separately, Redfin’s Home Demand Index hit an all-time high. “The economy is recovering strongly and mortgage rates are still near all-time lows. Those two forces combined have caused homebuying demand to hit a record high,” said Redfin Chief Economist Daryl Fairweather. “People who tried to buy a home in the spring are coming back for round two, only to find the market is still quite difficult because of a lack of homes for sale. A lot of homebuyers wish they had bought last year, now that it’s not just homes that are more expensive, but also gas, groceries and dining out. Many buyers today are limited to move-in ready homes because it is so difficult and expensive to purchase new appliances or find contractors to make improvements.”

Morning Report: The economy appears to be accelerating into the fourth quarter

Vital Statistics:

  Last Change
S&P futures 4,700 13.2
Oil (WTI) 78.55 0.23
10 year government bond yield   1.60%
30 year fixed rate mortgage   3.27%

Stocks are lower this morning on no real news. Bonds and MBS are up small.


Initial Jobless Claims came in at 268k last week. We are still well above pre-COVID levels, but at least the numbers are trending down.


The index of leading economic indicators increased in October, according to the Conference Board. The index rose 0.9% after increasing 0.7% in August and September.

“The U.S. LEI rose sharply in October suggesting the current economic expansion will continue into 2022 and may even gain some momentum in the final months of this year,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Gains were widespread among the leading indicators, with only the average workweek and consumers’ outlook making negative contributions.

“However, rising prices and supply chain bottlenecks pose challenges to growth and are not expected to dissipate until well into 2022. Despite these headwinds, The Conference Board forecasts growth to remain strong in the fourth quarter at around 5.0 percent (annualized rate), before moderating to a still historically robust rate of 2.6 percent in Q1 2022.”


Here is a good video describing what happened with Zillow Offers and the Orlando housing market. The Wall Street Journal also had a long piece about how Zillow’s algorithm got it so wrong. Zillow was obviously chasing properties in the hottest markets (especially Phoenix) and was overestimating the value that its improvements. It looks like the company is stuck with inventory and will be selling them at a 5% – 7% loss.


New York Fed Head John Williams spoke yesterday about Fed interventions into the Treasury and financial markets. If you were hoping that the Fed might allow the market for interest rates to become, well, a market, then you might be disappointed.

It’s also clear that we need not start from a position of how things are, but instead, how they should be. Let’s not think of how we can reform, but how we can design. Let’s create a system that can better withstand the unforeseeable and the unpredictable.

The problem with “designing a market” is that interest rates are an important input into the economy. They transmit critical information about the supply and demand for capital. For the last 12-13 years, the Fed has been actively intervening in the interest rate markets. God knows how they will handle the disruption if / when the sovereign debt bubble bursts.


The choice for the next Fed Head is between Jerome Powell and Lael Brainard. She is perceived as more dovish than Powell. The market perceives Brainard as more political than Powell: “Powell, I think, will be much less concerned about the midterm elections in determining when they should raise interest rates,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “I’m not saying that’s what Brainard is going to do if she’s in that seat, but that’s going to be the perception.” FWIW, the Fed has historically been loath to make any monetary policy changes late in a Presidential election year, but this is the first time I have heard a mention of midterms.

The impact on the Treasury market would be worse (at least for mortgage bankers) if Biden nominates Brainard. She will be viewed as more inflationary. FWIW, the Fed Funds futures are still handicapping either two or three rate hikes next year. Brainard would mean a steeper yield curve (in other words a bigger difference between long-term and short-term rates).

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