All Things in Moderation

Stocks are higher after an okay jobs report. Bonds and MBS are rallying

 

Nonfarm payrolls rose 192k in March, slightly behind the 200k estimate. February was revised upward to 197k from 175k. The ADP Jobs report was spot on, for once with their estimate of 191k. The unemployment rate was unchd at 6.7% and the labor force participation rate rose to 63.2%. Average hourly earnings were flat, while average weekly hours increased to 34.5. So overall, it is an okay jobs report, nothing great, but nothing terrible either. Par for the course these days. 

 

Separately, outplacement firm Challenger, Gray, and Christmas reported that announced job cuts fell 30% in March, making the first quarter the lowest in announced job cuts in 20 years. Announced job cuts are dropping, and the ISM reports show employment plans are increasing. 

 

Smallish homebuilder Beazer Homes gave an update yesterday. Orders are down 9%, while backlog is down 2%. Orders on the West Coast dropped 16%. It appears prices simply moved to far too fast out there. 

 

James Lockhart, former regulator for Fan and Fred says the stocks are worthless. At this point, they are litigation lottery tickets. 

Markets are flattish after initial jobless claims jumped to 326k. Bonds and MBS are up small.

Challenger and Gray reported that announced jobs cuts are down 30% from a year ago. Most businesses seem to be picking up, and the financial industry has already downsized for the brave new no refi world.

The consensus seems to be that the Fed starts hiking rates in late 2015. What could delay it? Well, another recession here, which doesn’t seem to be in the cards. Or, a China implosion, and it looks like the smart money (Soros, Chanos etc) are betting on one. China has been growing so fast for so long, that it pretty much seems inevitable. It seems like periods of rapid growth foment real estate bubbles and a mountain of debt, which seem to culminate in a violent crash (called the Minsky Moment). We had one in the 1930s after a period of rapid growth post WWI, Japan had theirs in 1989 after a great two-decade run in the 70s and 80s, and China has had an incredible run since Mao Zedong’s death.

If China has their Minsky moment, what will be the fallout? The biggest one, IMO, will be a collapse of commodity prices. Second, China will try and export their way out of the collapse. Finally, they may end up dumping their properties in the US and Canada. We could see some pricing pressures at the high end of the market (remember in crises, you sell what you can, not necessarily what you want to). None of this would be inflationary, in fact China will be exporting deflation. This will give the Fed conniptions as they hope the US economy strengthens enough to reach escape velocity from a global deflationary spiral. In other words, if China hits the wall, the Fed will be very reticent to raise rates.

There were 43,000 completed foreclosures in Feb 2014, down 15% year over year, according to CoreLogic. The foreclosure inventory is down to 752k homes down 35% from a year ago. The judicial states (primarily FL, NY, and NJ) still have the biggest foreclosure percentages.

Markets are flattish this morning on no real news. Bonds and MBS are down.

Mortgage Applications fell 1.2% last week. Purchases were up slightly, but refis fell.

The ADP Employment Change is forecasting 191k nonfarm payrolls this Friday. This has not been a very accurate predictor as of late, so take it with a grain of salt. Estimates are all over the board, with some as low as 100k and some as high as 275k. A lot of it will be due to weather, and the big question will be whether we had some pent-up hiring demand that got caught up in March.

Ellie Mae’s Encompass system went down for 24 hours yesterday. Apparently it was some sort of malicious attack. Things seem to be back on track, though. Lots of originators were unable to close loans yesterday. Imagine if it had happened a day earlier – end of the month and end of the quarter.

Markets are higher after some decent economic data out of Europe. Bonds and MBS are down small.

The ISM Manufacturing Index rose to 53.7 from 53.2. While new orders rose slightly, the production index jumped from 48.2 to 55.9. The snippets from various business owners seem to agree that the first quarter is looking good, and that things are accelerating. If you annualize out the March reading of 53.7, it would correspond to a GDP growth rate of 3.5%. Of course manufacturing isn’t the entire economy, but it shows that there is at least one part that is working. Senator Barbara Boxer noted the nascent manufacturing boom and said that the U.S. needs to ensure an adequate supply of affordable energy in order to entice companies to re-locate production back to the U.S. “While everyone would like to see alternative energy companies prosper, we have to recognize that coal and natural gas will remain the mainstay of U.S. energy and we are shooting ourselves in the foot if we raise fossil fuel prices in order to encourage more green energy.”

February construction data is out, and it looks like it rose .1% month-over-month from January and is up 8.7% year-over-year. Private construction is up 13% year-over year, while public construction was flat. Residential construction was up 13.5%. Nobel Laureate Paul Krugman noted in his blog that private construction seems to be doing just fine and there is no need to push up public construction as it would only add to inflationary pressures.

Domestic vehicle sales are out today, with both Ford and Chrysler noting a bounce mid-March. GM was unable to release their March sales numbers due to a computer problem. Separately, GM CEO Mary Barra will be testifying before the House at 2:00 pm today regarding the recall issue. Representative Henry Waxman said that “The botched roll-out of the Affordable Care Act shows that mistakes will happen and perhaps the government should have a little humility before it second-guesses everything a company does.”

House prices rose 12.2% in February, according to CoreLogic. House Prices remain just under 17% lower than their peak in April 2006. Price Appreciation has been driven by limited inventory, and CoreLogic expects prices to moderate over the coming year as increases in home equity releases pent-up supply. That said, there is still the small matter of the first time homebuyer who remains MIA. Separately, Janet Yellen mused that the Fed may have kept rates too low too long which could have been a contributing factor to the real estate bubble. “It may be time to take a second look at the dual mandate” she said.

We are beginning earnings season next week and it looks like weather will be the excuse du jour over why companies missed their earnings targets. GM, McDonalds, and FedEx already warned, blaming the weather. Amazon.com CEO Jeff Bezos reaffirmed the company’s commitment to margin expansion over revenue growth at a recent Morgan Stanley retail conference. “You can’t make it up on volume” he reportedly said.