All Things in Moderation

Vital Statistics:

Stocks are lower this morning after a surprisingly weak jobs report. Bonds and MBS are up.

Jobs report data dump:

• Nonfarm payrolls up 98,000. Expectations were for 175k so this is a huge miss
• Unemployment rate down to 4.5%
• Employment to population ratio increased to 60.1%
• Average hourly earnings up 0.2% MOM and 2.7% YOY
• Labor force participation rate flat at 63%

Part of the payroll miss could be explained by bad weather in the Northeast and the Midwest in March. We saw jobs increase in professional and business services while payrolls contracted in retail. The labor force increased by 145k, while the number of employed people increased by 472k and the number of unemployed fell by 326k. The number of involuntary part time employees (people who would like a full time job but can only get a part time one) fell, as did the number of long term unemployed and discouraged workers. While the payroll number will garner all the attention, the internals of the jobs report show the slack is being used up in the labor market, so it isn’t as bad as it initially appears.

The Fed Funds futures took down their probability of a June hike from 71% to 66% on the jobs report.

Two things happened yesterday which could push bond yields lower. First the US attacked air bases in Syria in retaliation for using chemical weapons. International tension is almost invariably bond bullish as investors put on the flight to safety trade. The other is the Democratic filibuster of Neil Gorsuch. This probably forecloses any sort of possibility for bipartisan legislation, particularly stimulus plans or tax cuts. In fact, the debt ceiling battle could become an epic game of chicken as the government is rapidly running out of borrowing capacity. While the second scenario is not necessarily bond bullish the first one definitely is.

Fannie Mae’s Home Purchase Sentiment index fell last month as high prices and low inventories take their toll. The number of people who think it is a good time to buy fell by 10 percentage points while the number tho think it is a good time to sell rose by 9 percentage points. People are less bullish on their economic future as well.

Neel Kashkari disputes Jamie Dimon’s assessment of the regulatory environment for banks, citing the Fed statistic that there is a 70% chance of a bailout in the next century.  Jamie Dimon declared the era of too big to fail is over, while Kashkari disagrees. Forecasting banking scenarios over a 100 year time period is probably a fool’s errand. I wonder what banking regulators thought in 1917 (The Fed had only been established a few years earlier). Kashkari is a bit of a regulatory hawk and thinks the capital standards should be doubled.

San Francisco Fed President John Williams says it should take about 5 years for the Fed’s balance sheet to shrink to a normal level once they start reducing it. Of course the open question is “what constitutes normal?” Prior to the financial crisis, the Fed’s balance sheet was under $1 trillion. It is now pegged at $4.5 trillion.

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Vital Statistics:

Stocks are lower this morning after the FOMC worried about stock prices. Bonds and MBS are down small.

Job cuts rose 17% in March, according to outplacement firm Challenger, Gray and Christmas. Telecom and retail were the two main sectors to trim staff. Note that this report only measures announced job cuts (in press releases), not actual job cuts. We are still seeing losses in the energy patch, however it is much slower than the past two years when we lost over 200k jobs.

On the other side of the coin, hiring announcements continue to hit records, with the Home Despot announcing 80,000 seasonal hires in March.

Initial Jobless Claims fell to 234k last week, while the Gallup Good Jobs index improved. The drop in initial jobless claims was the most in 2 years.

The FOMC minutes showed the Fed is beginning to discount the possibility of a big Trump fiscal expansion. The failure of health care reform means that the available resources for a big infrastructure spend or tax cuts is much less. The Fed also discussed what to do with their $4.5 trillion balance sheet, and how to go about shrinking it. The terms “gradual” and “phase out” were used, which means they probably aren’t going to stop reinvesting maturing principal all at once and will perhaps take a couple of meetings to see how it goes. The Fed’s fear is that the additional contractionary effects of reducing the balance sheet along with rate hikes will be too much and push the economy into a recession.

The staff also noted that stock values are above historical norms, which is undoubtedly another reason for them to go slowly. The worst-kept secret in financial markets is that the Fed targets asset prices and uses them to guide policy.

Goldman Chief Economist Jan Hatzius says that reducing the Fed’s balance sheet is probably a good step to clear the decks for whoever will be the new Fed President ahead of the end of Janet Yellen’s term in early 2018.

The left has set up a new website to keep track of HUD and what they are doing. They want to ensure that affordable housing targets don’t fall by the wayside as HUD works on housing reform. Given the tight housing inventory these days, affordable housing is a huge need.

Donald Trump economic adviser Gary Cohn supports some sort of return to the Glass-Steagall days, where consumer banking is separated from the underwriting and trading functions of investment banks. Some Senators and policy types were surprised to hear a Wall Street type advising that. The conversation regarding deposits will be further complicated by the emerging fintech sector which wants access to those deposits as well.

The Senate is expected to exercise the nuclear option today and eliminate the filibuster for Supreme Court nominees. Neil Gorsuch will probably be confirmed on Friday.

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Vital Statistics:

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

The minutes from the FOMC meeting are coming out at 2:00 pm EST today. Investors will be focused on plans to shrink the balance sheet and also any sort of discussion about DC. Be careful locking around that time – we could see some volatility.

Richmond Fed President Jeffrey Lacker resigned yesterday for making unauthorized disclosures to a consulting firm owned by the Financial Times. Lacker was a non-voter, so it should make no difference to monetary policy.

Mortgage applications fell 1.6% last week as purchases rose 1% and refis fell 4%. Refis fell to 42.8%, the lowest since October 2008.

The ADP jobs number came in at 263,000 which means we should expect a strong employment situation report this Friday. The Street is predicting 178,000 jobs were added in March. Construction added 49k jobs while IT lost 10k. This is the third month in a row with more than 240k jobs added:

The Gallup US Job Creation index also hit a new high. The US PMI Services index fell however. The ISM Services index fell as well.

Don’t forget, we are exiting Q1, which for some reason has been a weak quarter for over a decade. If past trends hold, we should be seeing a pickup during the spring and summer.

Jamie Dimon weighed in on banking regulation in JP Morgan’s annual letter to shareholders. The system is much safer today than it was in 2008, however he argues that many of the regulations put in place were hastily drawn up and should be reviewed. He mentioned that new regulations surrounding mortgage lending have raised costs to consumers and restricted lending to people with low credit scores needlessly. Interesting comment since JP Morgan pretty much got out of the FHA business years ago.

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Vital Statistics:

Stocks are lower this morning after auto sales disappointed. Bonds and MBS are up.

Factory orders rose 1% last month, in line with expectations.

US economic confidence decreased last week, according to Gallup, however confidence is still strong. Meanwhile, consumer spending was flat.

These data points (economic confidence, consumer spending, and auto sales) illustrate the conundrum we have been seeing for the past few months: soft data like confidence and ISM reports show a strong economy, while the hard data like sales have been showing a mediocre economy. Much of this is Washington-driven as investors realize that Trump will have a difficult time pushing through his agenda in the face of unified Democratic opposition and a Freedom Caucus that wants less government, period. Unrealistic expectations are being brought back to Earth. Despite gridlock, much is being done on the regulatory front and with executive orders which don’t require Congressional approval. That will help. But there seems to be a shift in the psychology of investors: the markets seem to be worrying less about the Fed and worrying more about tepid growth. Bonds have noticed as well, with the 10 bond yield down about 30 basis points over the past 3 weeks.

Home prices rose 7% YOY in February, according to CoreLogic. We are seeing the highest price appreciation at the lower price points. The first time homebuyer is getting hit with a double-whammy of higher prices and borrowing costs.

Housing’s share of GDP came in 15.6% in the fourth quarter. Historically, that number has been around 18%. Housing continues to punch below its weight, as evidenced by tight inventory. It is hard to know exactly why homebuilding continues to be weak – credit is an issue, as is the general post-bubble caution, along with local land use regulations.

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Vital Statistics:

Stocks are flattish on no real news. Bonds and MBS are flat as well.

The ISM Manufacturing Report ticked up slightly in March. New orders and production slipped while employment gained. Prices rose as well. The reading of 57.2 would correspond historically with about a 4.4% increase in real GDP.

Construction spending rose 0.8% MOM in February and is up 3.0% annualized. Residential construction rose 1.8% MOM and is up 6.3% YOY.

We have a relatively news heavy week coming up with the FOMC minutes and the jobs report. We will also get the ISM data this week.

This week will give will also be important politically. Republican Supreme Court nominee Neil Gorsuch will be voted on in the Senate. Minority leader Chuck Schumer has demanded a 60 vote threshold to confirm him (here is the current state of affairs there), and Mitch McConnell has said Gorsuch is getting confirmed one way or the other, which is a threat to change Senate rules on judicial nominations (the nuclear option). If the Democrats filibuster Gorsuch and McConnell changes the rules, it pretty much poisons the well for any sort of bipartisan legislation like health care reform, tax reform, or financial reform. This would be good for rates at the margin.

Cash-out refinances are about 44% of all refis these days, which is a pickup from the depths of the bubble, but nowhere near the heady times of the bubble years where people used cash out refis to fund consumption. Today, cash-out refinances are used more to refinance debt, especially credit card debt.

As a general rule, when stocks and bonds disagree, go with what bonds are telling you. Mohammed El-Arian breaks that rule to say the bond market has it wrong. His point is that the bond market is underestimating how assertive the Fed is becoming.

Good article for the first time homebuyer.. All the stuff that can come up and surprise you. Bonus tip: Don’t load up on credit for all the things you will need for your new house until after your loan closes.

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