Morning Report: Friday’s jobs report and the FOMC 2/5/18

Vital Statistics:

Last Change
S&P Futures 2848.0 -9.0
Eurostoxx Index 382.4 -5.7
Oil (WTI) 65.0 -0.4
US dollar index 83.6 0.0
10 Year Govt Bond Yield 2.83%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.26

Markets are lower this morning as last week’s weakness continues. Bonds and MBS are flat.

Not a lot of data this week (typical in the week after the jobs report), but we will have plenty of Fed-Speak all week.

The services economy continues to hum, as the ISM non-manufacturing PMI hit 59.9.

Bonds rolled over Friday on the jobs report, which showed stronger-than-expected wage growth. The 10 year bond yield has increased dramatically since last fall, and it certainly looks like bond yields want to test that 3% level.

Despite the big sell off in the bond market on the jobs report, the Fed Funds futures didn’t really do much – they are predicting a 78% chance of a 25 basis point hike in March, which is where it was mid week. Janet Yellen has previously said she wanted to “let the labor market run hot” and Jerome Powell is considered to be more or less the same philosophically as Yellen was on the issue of monetary policy. I suspect the Fed is comfortable to maintain the current pace of rate hikes, to get off the zero bound and allow the economy to digest the new levels. They don’t need to be aggressive quite yet, and IMO they are looking at the employment – population ratio as much as the increase in average hourly earnings. If you look at it from their standpoint, they have a duty to maximize employment as well as control inflation. Even though the unemployment rate says “full employment” the employment to population ratio and the labor force participation rate do not. Some of the drop is demographic, but not all of it. Here is a way to put the drop in the labor force participation rate into perspective: The big increase in the labor force participation rate started in the 1960s and was driven by women entering the workforce. Half those gains were given back during the recession. Until that number moves up, the Fed is going to stay dovish unless we get a massive upward surprise on inflation.

Won’t all of these raises were are seeing force the Fed’s hand? More and more companies are increasing compensation and capital expenditures. Keep this in mind: one-time bonuses are probably not going to do much for inflation, especially if they are saved / used to pay down debt. That said, the increase in paychecks from tax reform starts this month.

The Atlanta Fed raised its Q1 GDP estimate to 5.4% on Friday. They have been a bit of an outlier in terms of growth predictions, but still – 5% plus is an eye-popping number.

Forbes has a list of the best housing markets for 2018… Lots of Midwestern and Southern cities, and none of the usual suspects like SF, Seattle, etc.

Acting CFPB Director Mick Mulvaney has taken the office of Fair Lending and Equal Opportunity and moved it under his direct control. Consumer advocates are unhappy, but this looks mainly like a shuffling of the organizational chart. The big change – Mulvaney will be in charge of enforcement, which is in keeping with the philosophy he outlined in his memo to the CFPB.

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