Morning Report – Productivity Falls 5/6/15

Stocks are higher this morning after yesterday’s bloodbath. Bonds and MBS are flat

The ADP Employment Change index is forecasting a weak employment report this Friday. They report shows 169,000 jobs were created in April, which was lower than the 200,000 estimate. The Street is forecasting an increase of 230,000 for Friday. This is the weakest report in over a year, and you can see the marked slowdown beginning this year. If the early weakness was just weather-related, then you should see some sort of rebound. You aren’t.

Some more disappointing data this morning – productivity fell 1.9% in the first quarter after falling 2.1% in the fourth quarter. Output fell .2% while compensation increased 6.2%. Unit Labor Costs rose 5%. Lower productivity has been driven by a combination of a stronger labor market and weak GDP growth, so it isn’t necessarily a bad thing, at least in the short term. It means that we could still see improvement in the labor market despite weak economic growth.

Mortgage Applications fell 4.6% last week as purchases rose .8% and refis fell 8.3%. Bonds got slammed last week, so that isn’t a surprise. The 30 year fixed rate mortgage rate rose to 3.93% from 3.85%. Refis as a percentage of loans fell to 52.5%.

Foreclosures fell to 2.22%, according to the MBA. Delinquencies fell to 5.54%.

As the rhetoric between Greek Prime Minister Alexis Tsipras and the EU gets more and more heated, the ECB is wrestling with how much of a haircut to demand on Greek collateral. The machinations between the Greeks and the EU are driving Euro yields, which are driving US yields. “The fundamentals have not changed, but bond markets have,” said Christoph Rieger, the Frankfurt-based head of fixed income strategy at Commerzbank AG. “The European bond markets are broken, hampered by low yields, high regulation and central bank intervention. Markets will have to get used to these erratic swings.” The European situation is why so many bond strategists got it so wrong in the US over the past year and explains why bonds are selling off in the US despite some weaker economic data.

Home Prices rose 5.9% annually, according to CoreLogic. A combination of tight inventory, low mortgage rates, and improving confidence is the culprit. Of course we need wage growth to make this actually sustainable, and it looks like we could be seeing the start of wage growth, at least according to the Employment Cost Index.

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