Morning Report: Strong ADP jobs report 3/8/17

Vital Statistics:

Last Change
S&P Futures 2368.3 1.8
Eurostoxx Index 372.8 0.6
Oil (WTI) 52.5 -0.6
US dollar index 92.0  
10 Year Govt Bond Yield 2.57%
Current Coupon Fannie Mae TBA 101.438
Current Coupon Ginnie Mae TBA 102.784
30 Year Fixed Rate Mortgage 4.19

Stocks are higher after a strong ADP jobs report. Bonds and MBS are down.

The private sector added 298,000 jobs in February, according to the ADP jobs report. This reading was the highest in 3 years and beat the consensus number by 115,000 jobs. January was revised upward as well. Construction employment increased by 60,000, which bodes well for home construction, although a mild winter probably affected that number.  Friday’s payroll number is forecast to be 195,000. The report sent the 10 year and the 2 year bond yield up 3 basis points.

Mortgage applications rose 3.3% last week as purchases rose 2% and refis rose 5%. Refis as a percent of total production increase marginally after hitting a 9 year low last week at 45.4%. The average mortgage rate increased by 6  basis points last week.

Productivity increased at a 1.3% annual pace in the fourth quarter as output rose 2.4% and hours worked increases 1%. Unit Labor costs increased 1.7%. Productivity was marginally below expectations, while unit labor costs were above. Productivity (or lack thereof) has been a consistent issue over the past 10 years. Productivity ultimately is what drives increases in standards of living.

Given the strong economic data, the Fed has been jawboning the markets, sending Fed Funds forecasts higher. The move over the past 3 weeks in the Fed Funds futures contracts was the result of a number of speeches designed to wake up the markets. “We didn’t clearly see how the balance of risks was shifting, so they have to slap our faces, and say, ‘Look, you are missing the point’,” said Tim Duy, an economics professor at the University of Oregon. You can see the huge change in sentiment in the chart below, which calculates the implied probability of a March hike:

Despite the chance of 2-3 hikes this year, the Fed isn’t really moving to a contractionary monetary policy regime. On a scale of 1 to 10, we are going from 9 to maybe 8.5. We aren’t even remotely near a normal level in the Fed Funds rate, which is still negative by about 100 basis points (the effective FF rate is trading at 67 basis points and the inflation rate is around 1.7% or so, so the real rate is about -1%).

Janet Yellen’s Fed is almost the mirror image of Alan Greenspan’s Fed in that Yellen communicates to the markets what the Fed is thinking, while Greenspan stayed as opaque as possible. Note that the last 3 times the Fed went into a tightening cycle, they blew up the mortgage backed securities markets (1994) the stock market bubble (1999) and the residential real estate bubble (2006). You could argue that we currently have a bubble in global sovereign debt in that bond prices are assuming that inflation has been vanquished and is never, ever, ever coming back.

Republicans released their repeal and replace of Obamacare, and for the most part it is pretty similar to Obamacare. There are some small changes, but it more or less keeps the same structure. Direct subsidies are being replaced by refundable tax credits, while the Medicaid expansion gets block granted to the states. The Cadillac Tax gets pushed out to 2025, and pricing becomes more of a function of age than income. Conservative Republicans are against it, as well as pretty much every Democrat.

When dealing with corporations, there is a public Trump (the tweeter) and the private Trump. Since taking office, he has hit pharma companies on drug prices, automakers on outsourcing, and even retailers. Behind closed doors he is more accommodating. This explains why business confidence has been increasing despite these public statements.

Despite the strong data, the Atlanta Fed revised its forecast for Q1 GDP to an increase of only 1.3%.

15 Responses

  1. I’d like to think mine’s in there too!


  2. Like I always say: My wife and I are both feminists, but as a man I’m a little bit better at it than she is.


  3. Guess why I think a dude took the picture.


  4. This bitch is woke, yo.

    Also, this is funny.


    • It’s funny, I’ve swapped Tweets about this very store with KW!

      The high-toned people of River Oaks are not too jazzed about that gigantic porn emporium on the corner just down from the Galleria,


    • Houston is unique. There is more private civic mindedness in H than anywhere else of nearly comparable size. New Orleans gets wiped? 125,000 people move to Houston, and maybe 50K stay. Houston has a plan to take in Galveston when the big one hits. Depends on a public private partnership. The Medical Center, largest in the world, 130K employees in a city of its own across South Main from Rice U. gets $2B in damge from a hurricane? H does not go to the state or the feds, just raises the money. 75K ethnic Chinese Vietnamese come to H after the war and the H Chinese community, established from the successful descendants of the SP RR built to terminate in H, absorb them. And voila! H gets a multi square mile of an Asia town all looking like malls stretching out Bellaire Blvd.

      It’s not just petrochemicals, either. Of course, plastic doesn’t go away when oil prices drop. H has a lot of everything, including a port bigger than NY-NJ and LA-LB added together.

      There are other organically successful cities around the nation. Austin is one. My neighborhood is easily a friendly integrated one without regard to skin color or national origin. It’s a tecchie neighborhood. Everyone has a lot in common, as CW points out. Commonalities bind.
      I do remember how much more isolated ethnic communities were from each other in older cities. My guess – keeping extended families together in those older cities stifled young folks who should have broken away – moved to new cities – got fresh starts Just guessing.


    • This is what real assimilation looks like:

      “A while back, I heard an older fellow of Mexican background complaining about the Guatemalans moving into his area — and he was an illegal immigrant. That’s a funny reality: In Texas, even some of the illegals don’t think that we can let just anybody cross the border.”

      Once you are telling other people to get off your lawn, you are an American. I suspect he would have been a Trump voter if he could have voted.


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