Morning Report: Strong payrolls offsets trade volatility 4/4/18

Vital Statistics:

Last Change
S&P futures 2576 -38
Eurostoxx index 365.5 -3.53
Oil (WTI) 62.56 -0.95
10 Year Government Bond Yield 2.75%
30 Year fixed rate mortgage 4.41%

Stocks are lower this morning on trade war fears. Bonds and MBS are up.

While the drop in the futures is pretty dramatic, the market is basically just giving back the end-of-day ramp yesterday after the Administration said there is nothing imminent with Amazon. We are coming out of a long period of low volatility in the stock market, and volatility begets volatility. The silver lining is that Treasuries love stock market volatility, so they stand to benefit at the margin.

Mortgage Applications fell 3.3% last week as purchases fell 2% and refis fell 5%. “Heading into the holiday weekend, mortgage application volume fell a bit both for purchase and refinance volume,” said MBA Chief Economist Mike Fratantoni. “Mortgage rates were little changed for the week, despite the increase in financial market volatility. Potential homebuyers may be a little rattled by the swings in the stock market the past few weeks, but the job market continues to strengthen, which should power demand through the spring season. The main uncertainty remains whether enough listings will be available to meet this demand.”

Factory orders increased 1.2% in February, a bit lower than the Street estimate of 1.7%.

The ISM Non-Manufacturing Index dipped in March to 58.8 last month. Interesting comment from a builder: “The unbelievable amount of market volatility in construction-related materials that started with lumber continues with the tariffs on steel and aluminum. Accurate, long-term planning has become incredibly difficult, as distributors that historically held costs for at least 30 days are now, in some cases, committing to only seven days, as prices can change drastically in that time.”(Construction). Increasing housing starts has been a manana story forever, and it looks like that might be the case again this year.

Street estimates for Friday’s payroll number might be too low, at least if you look at the ADP number, which came in way stronger than expected at 241,000. The Street is looking for an increase of 175k in Friday’s report. While the ADP number doesn’t track the BLS number as tightly as you think it should (it actually tracks the revised number, not the preliminary one), it does indicate that trade issues haven’t affected employment, at least not yet. Manufacturing payrolls increased by 29k (strongest in 3 years), but remember that there are winners and losers in a trade war with China. For every steelworker, there are many more who work for a manufacturer that uses steel as an input. Construction employment was up smartly as well.

Wilbur Ross said that the US may end up negotiating with China on trade. In other words, all of this is simply a negotiating tactic.

Regardless of the payroll number, the main focus is wage inflation these days, so even if you get a big payroll number you might not see much of a reaction in the bond market if average hourly earnings are only up a little (consensus is 0.3% MOM / 2.7% YOY). Higher wages are fighting to chart below, which is the employment-population ratio. The most striking feature is how dramatic the Great Recession was. Most of the 30 increase in the ratio which was driven by women entering the workforce was given back.

employment to population ratio

The Fed has a model which looks at demographics and that ratio, which predicts a drop in the ratio due to the retirement of the baby boomers. In fact, that model shows that we are much closer to full employment than the chart above suggests.

Lennar reported first quarter earnings this morning. It it hard to read too much into the numbers: there are tax charges from tax reform and a partial quarter for the CalAtlantic deal, so the increases in orders, backlog, average selling prices, etc aren’t really comparable to other builders. Lennar also launched a second multi-family fund, while it is looking to sell Rialto, its commercial real estate arm.

San Francisco Fed Chairman John Williams has been nominated to take over the NY Fed. This makes him Vice Chairman of the FOMC as well.

Vehicle sales rebounded last month, which should boost Q1 GDP estimates.

Spotify went public yesterday without the services of an investment bank. Not sure that we are quite ready to write the epitaph for investment banking, but this is a big deal.

25 Responses

  1. If trade restrictions as tight as are being bandied about by the USA and China go into effect it will have a negative effect. How much? Depends on how restrictive.

    Would Congress exert its trade authority if contraction is apparent, especially on Ag exports? NoVA?

    The Ag Committee in the Senate seems to easily reach bipartisan agreement, even in this polarized climate.


    • I doubt Congress would act. just a gut feeling. i can’t base that on anything. and I have about 0 experience with the committee of jurisdiction here.


    • My gut feeling from the hinterlands is that if it involves congress actually taking action, it won’t happen. They don’t like taking action.

      Recent Remnant podcast with Ben Sasse had Sasse saying that congress-critters routinely go to the executive branch and ask them to do things with executive orders by fiat, rather than being bothered to pass a law about it, even if it’s almost guaranteed the law would pass congress as current constituted. They don’t want it on their record. Even if the majority would support it in theory.

      Congress is primarily kabuki with a little sincere pork-driven legislation thrown in.


  2. Trump manages to convince Vox that keeping US troops in Syria is a good idea because he opposes it.

    Liked by 1 person

    • “On a larger scale, it would all but assure President Bashar al-Assad victory in Syria.”

      earth to vox. that was never in question.


      • Well it was, but only while the choice was ISIS vs Assad.

        Defeating ISIS means Assad wins. “Moderate Rebels” was never an option. The moderates are all either dead or have left the country.


        • that’s more complete. and a fair point.

          also — I gave up PL for Lent. I don’t think I’m going back. I feel like a better person. Certainly less irritable. and that’s the only change I’ve made recently. so maybe it’s a correlation, but it’s good enough for me.

          Liked by 1 person

        • I haven’t been to PL in ages… I got shadow banned

          Liked by 1 person

        • Yeah, I almost never go to PL. A) It’s a bother working around the 5 article limit. And eventually they’ll adapt it so even private browsing doesn’t work. I know that’s coming.

          B) Also, it’s just the same nonsense, day in and day out. Whatever thoughtfulness might have existed there vanished with Trump’s election. It’s just constant reflexive “Trump is NuHitler!” all day, every day.


    • Vox and Slate are almost nothing but counter-signal for whatever Republicans seem to be in favor of at the moment.


  3. Useful corrective to the Facebook hysteria:

    “The headlines are scary, but the pathology behind them is actually the most alarming and unreported aspect of the Facebook story. The world seems simultaneously to be denouncing the company for having meddled with an election, and demanding that it meddle more responsibly in the future. From senators to members of the media to security officials, the solution to the problem of “fake news” and foreign intervention in our elections has been absurdly simplistic: Just have Facebook fix it.

    Facebook’s decision to accept “responsibilities” in the news realm, even in this rudimentary and characteristically disingenuous way, has mind-blowing implications for a country that has functioned without a true media regulator for most of its history.

    That’s because all of these horror-movie headlines about fake news and “meddling” gloss over the giant preceding catastrophe implicit in all of these tales. For Facebook to be both the cause of and the solution to so many informational ills, the design mechanism built into our democracy to prevent such problems – a free press – had to have been severely disabled well before we got here.”


    • Cambridge Analytica has since been revealed to be a con’s con – in 2015, it was selling Ted Cruz on “secret sauce” intelligence services it hadn’t even finished designing yet.

      This is the story of pretty much *all* such companies. Any time you’re going to be “first out the door” with this fabulous new software/algorithm/system this new company (or new division/project in an older company) has developed, they are universally and always selling vaporware. Sometimes it’s just that it can’t possibly even begin to do what they claim until they’ve been tweaking it and testing and refining it for a decade. Often it is because it is not remotely done, sometimes not even truly out of the planning stages and managers and non-technical people want to go ahead and sell it now and figure they’ll get clients to “pay for them to develop it”, and then they will sell the finished product without ever having really invested in it themselves.

      Even if it’s a relatively complete technology, it’s often still vaporware. Because they are promising magical analysis of big data that isn’t going to happen without a lot of trial and error and a lot of work. And it’s not a straight forward process: what all that data means today, when they can barely tease any useful information out of it, is far different than what it will mean 5 or 10 years from now when their technology is actually beginning to mature.

      Tech companies sell vaporware all the time. They aren’t Amazon or Facebook or Google. They are selling with PowerPoints and printed reports and white papers. They’ve got their Glengarry Glen Ross salespeople out peddling snake oil. This may be a different kind of snake oil a decade or two hence (but still mostly snake oil), but at the outset it’s almost always vapor. In the case of Cambridge Analytica, is was most likely vapor wrapped in static (mostly raw data with some weak processing applied to provided information as useful and informative in the end as the static snow on an old television set).


      • True pithy quote from me when I worked at a Fortune 500 company and was in a meeting with other managers and directors about to commit to a multi-million dollar purchase and implementation of a software product that wasn’t actually shipping yet:

        “You can buy vaporware, but you can’t install it”.

        The observation wasn’t received well by management, but the other technical people loved it.

        Project failed as did the company later on down the line.

        Liked by 2 people

    • And it was. Long before 2016 had a chance to happen, the news media in the United States was effectively destroyed. For those of us in the business, the manner of conquest has been the most galling part. The CliffsNotes version? Facebook ate us.

      I think they real corrective here would be to say: Our product was 90% crap and filler. Thus, almost any alternative became preferable to the news-consuming public, because what we were selling was of very low value and quality to consumers.


      • No, they were convinced to give it away for free and rely on an advertising model, and then Facebook and other aggregators came along and destroyed the advertising model. Taibbi is pretty much spot on with regards to how local news organizations have completely failed to make their own sites successful vis-a-vis web advertising.

        That’s separate from the other problems with the media, but it is very relevant to their revenue model.

        Liked by 1 person

        • One issue with local news, at least tv news, was that it is/was a ratings loser and always has been. That’s why the news is always at the same time across the dial, so that people wouldn’t change the channel. Why bother, it’s the same thing.

          As for local print media, I think the problems was an aging population that got their news from the paper versus a younger population more used to a tv diet of news versus an even younger population who got it from the internet. Ultimately, all of these consumers of news were a relatively small fraction of the overall consumer landscape.

          Liked by 1 person

        • Taibbi is pretty much spot on with regards to how local news organizations have completely failed to make their own sites successful vis-a-vis web advertising.

          Few of them–very few–were going to ever get away with a subscription model. So making advertising work was basically there only option. That or donations.

          Facebook competes in a lot of ways, but ads is definitely one of them. They did more to socialize news aggregation. News story online are becoming primarily forums in which people are given a topic to bitch about, and then start bitching. You kill the forums at a place like WaPo and traffic will die off at least 20%.

          It was always going to alter in some way. I want access to news, I have immediate options at my fingertips. If you charge money, I’ll go back to search and fine the next person who doesn’t.

          Finally, I feel certain pubs with quality content that remains steadfastly appealing to their market can and do charge subscription rates and remain at least marginally profitable. Say a WSJ. There is a greater perceived quality there to a large number of people than there might be to some other publications.

          I think quality of product is relevant. If your product is not that good compared to all the alternatives, that’s fine if you are the only vendor or one of the only vendors and if they want a news-like substance, you are practically the only choice. When there is a plethora of sources, including a variety of niche source cultivated by your friends on social media, then professional curators who do a bad job become an unnecessary expense.


  4. Another useful corrective:

    “Before the Media Lionized Martin Luther King Jr., They Denounced Him

    Reflecting on revisionist history 50 years later.
    By Matt Taibbi”

    Liked by 1 person

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