Morning Report: The economy added 742k jobs in March

Vital Statistics:

 LastChange
S&P futures4,17720.8
Oil (WTI)66.440.77
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.13%

Stocks are higher as commodity prices continue to rise. Bonds and MBS are flat.

Janet Yellen caused a stir in the markets yesterday when she said that interest rates may have to rise somewhat to prevent overheating in the US economy. She later walked back that comment (the Treasury Secretary is not supposed to be suggesting policy to the Fed), and clarified her statement. Regardless, the Fed Funds futures are handicapping at least a chance of a rate hike this year despite the language out of the Fed that the labor market is nowhere near ready for rate hikes.

The private sector added 742,000 jobs in April, according to the ADP Employment Survey. Roughly a third of these jobs were in leisure / hospitality however employment grew is pretty much every category. Note that the Street is looking for about 940,000 jobs in Friday’s Employment Situation Report, so that estimate could be a touch high.

Mortgage applications decreased modestly last week as purchases fell 3% and refis were basically flat. “There was a mixed bag of action in the mortgage market last week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates were slightly higher, refinance applications were essentially unchanged and purchase applications fell for the second straight week. Both conventional and government purchase applications declined, but average loan sizes increased for each loan type. This is a sign that the competitive purchase market, driven by low housing inventory and high demand, is pushing prices higher and weighing down on activity. The higher prices are also affecting the mix of activity, with stronger growth in purchase loans with larger-than-average balances.”

The MBA refinance index is below. You can see we are still quite elevated compared to historical numbers

Factory orders rose 1.1% in March. Part of the uptick we are seeing in inflation is due to inventory restocking. In many ways, this is reminiscent of the economy back before things like just-in-time inventory management and globalization. The economy would expand, companies would aggressively build inventory to compete, inflation would rise, which would trigger a response from the Fed, which would cause a recession and then the cycle would repeat.

For companies, inventory is a big use of cash, so they try to minimize it. Technology and data allowed them to use just as much as was necessary to meet demand, which improved cash flows. The COVID-19 pandemic revealed some of the issues with that model, and perhaps we will see some sort of reversal. These issues won’t necessarily show up in corporate financials as increased costs as much as they will manifest as lost opportunities.

I suspect the re-adjustment to this will take years and this will improve economic performance over the next few years. The big question revolves around commodity prices and whether they trigger inflation. My guess is they will not, as producers will invariably ramp up production and energy demand can be met quickly. People forget that 10 years ago, oil was trading around $125 a barrel. Lots of wells were drilled then that can be turned on pretty quickly.

Commodities rallied hard 10-15 years ago, driven by insatiable demand for everything out of China. We didn’t see a wave of consumer inflation then, though we did see a wave of asset inflation, especially real estate. Regardless, the Fed generally views commodity-push inflation as transitory and will probably not react to it. The economy should be relatively strong over the next few years, driven by inventory build, and housing.

18 Responses

  1. Here we go:

    “Federal judge vacates CDC’s nationwide eviction moratorium ”

    https://www.washingtonpost.com/dc-md-va/2021/05/05/federal-judge-vacates-cdcs-nationwide-eviction-moratorium/

    Liked by 1 person

    • we have property rights in this country? since when?

      Liked by 1 person

      • First line of every story “Trump appointed judge …”

        Liked by 1 person

        • jnc:

          First line of every story “Trump appointed judge …”

          Best reason to have voted for him.

          Liked by 1 person

        • Most useful analysis of the case that I have seen:

          https://reason.com/volokh/2021/05/05/yet-another-federal-court-rules-against-the-cdc-eviction-moratorium/

          While this is fifth such decision against the CDC it is the most thorough, Somin thinks. And for good reason. A good read.

          Like

        • Mark:

          While this is fifth such decision against the CDC it is the most thorough, Somin thinks.

          To me the fact that it takes that many rulings and words to “thoroughly” explain something as patently obvious to any serious person as the fact that an unelected bureaucrat in the Centers for Disease Control cannot have the Constitutional authority to cancel the property rights of every landlord in the nation says something about the practice of Constitutional law in the US.

          And that something is not good.

          Like

    • Oh, Pfizer not gonna like that.

      They really want Big Pharma as an enemy? The folks who held on to the fact they had a vaccine ready until after the election to keep it from being “political”?

      Seems unwise.

      Like

  2. Doctor vaping to prove face masks don’t work!

    I know, they probably can work, but most of them don’t wear them in a way that makes them work for obvious reasons.

    I intentionally have masks with lots of open gaps at the side and around the nose so breathing is easier.

    Although there are the number of studies that suggest face masks don’t do anything to help prevent COVID.

    https://fee.org/articles/new-danish-study-finds-masks-don-t-protect-wearers-from-covid-infection/

    Which could certainly be true and, if so, proves once again that conflating “common sense” with “science” doesn’t make intuitive beliefs into scientific fact.

    And this one:

    https://www.rcreader.com/commentary/masks-dont-work-covid-a-review-of-science-relevant-to-covide-19-social-policy

    But Politifact says face masks totally work:

    https://www.politifact.com/factchecks/2020/jul/31/facebook-posts/no-cdc-who-study-does-not-prove-masks-do-not-preve/

    Which suggests to me that the jury is out and remains out. Just because something makes intuitive sense doesn’t mean that it’s true.

    Certainly, case numbers and deaths in areas with stringent lockdowns in the US might indicate they don’t accomplish all that much. Some places with severe lockdowns had much better results than in the US, as I recall, but also had a lot more power to shut off or curtail travel into and out of their country.

    Just sayin’.

    Like

    • KW:

      But Politifact says face masks totally work:

      Even less definitive…just that there is no evidence they don’t totally work!

      Like

      • And I can come up with a study that proves it:

        Set null hypothesis: Masks TOTALLY work
        Set alternative hypothesis: Masks don’t work

        Conduct statistical analysis that fails to generate a statistically significant t-stat

        Unable to confirm alternative hypothesis, so accept the null.

        Conclusion: Masks TOTALLY work!

        Like

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