Morning Report – stronger-than-expected revision to 3Q GDP

Vital Statistics:

Last Change Percent
S&P Futures 1790.1 -1.7 -0.09%
Eurostoxx Index 2989.6 -2.2 -0.07%
Oil (WTI) 97.44 0.2 0.25%
LIBOR 0.242 0.000 -0.10%
US Dollar Index (DXY) 80.76 0.140 0.17%
10 Year Govt Bond Yield 2.86% 0.03%
Current Coupon Ginnie Mae TBA 104.3 -0.1
Current Coupon Fannie Mae TBA 103.4 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.52
Markets are slightly lower after a stronger-than-expected GDP report and some other good labor-market data. Bonds and MBS are selling off, and the market is setting itself up for a strong jobs report tomorrow.
The second revision to third quarter GDP came in at 3.6%, much higher than the 3.1% estimate. Consumption was a little lower than expected at 1.4%, and the inflation was at 2%. Inventory build drove the increase, and consumer spending was somewhat low, so unless spending picks up, Q3 will end up “borrowing” growth from Q4. The main takeaway from the report? Higher interest rates aren’t acting like a drag on the economy, at least not yet, which has to be a relief to the Fed.
Initial Jobless Claims printed below 300k, although that number should be taken with a grain of salt due to the Thanksgiving holiday. Challenger and Gray reported announced job cuts dropped 20% as well. The Challenger Survey looks at company press releases of restructurings and job cuts. Many of these cuts never end up materializing, but they do weigh heavily on consumer confidence.
The Street expectation for payroll growth is 185k, and a print like 220k would be considered a “blowout” number. However, historically, is that a “good” number? Actually it is. Since 1980, monthly payroll growth has averaged around 100k. During the boom years of the 95-99, payrolls averaged 224k a month. So something like 220k would be considered a “normal” expansionary number, with all the caveats about population growth, etc..

In an effort to change the subject from the growing pains of obamacare, the President gave a speech about income inequality and the need to hike the minimum wage. Politically, this is going absolutely nowhere, and all he is really doing is rallying his base. Separately, fast food workers in 100 cities today are going on strike to protest low wages. It will be interesting to see if they get any traction. The reason why inflation has been so low has been the lack of wage growth – you cannot get a wage / price spiral if the “wage” side doesn’t cooperate. The Fed wants to see a modest amount of inflation – for the average American, 3% inflation and 3% wage growth is a lot more comfortable than 0% inflation and 0% wage growth. Plus, the biggest problem for Americans is debt, and inflation is a debtor’s best friend.

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