Morning Report: Strong jobs report

Vital Statistics:

S&P futures3,7636.75
Oil (WTI)89.841.38
10 year government bond yield 3.86%
30 year fixed rate mortgage 6.74%

Stocks are higher this morning after the jobs report. Bonds and MBS are down.

The economy added 263,000 jobs in September, which was above the Street estimate of 250,000 and the ADP estimate of 208,000. The unemployment rate fell to 3.5% and average hourly earnings increased 5% The labor force participation rate fell to 62.3% as the labor force shrank.

Overall, this report won’t move the needle for the Fed either way. The reaction in the bond market was a slight sell-off, with a continued inversion of the yield. curve. The Fed Funds futures still see a 75 basis point hike in November, and another 50 in December. Looking into 2023, it looks like we are seeing another 25 basis points before the March 2023 meeting, and that is it. So we peak out at a range of 4.5% – 4.75%. This comports with what Chicago Fed President Charles Evans said yesterday.

Interestingly, the futures see the December 2023 rate at 4.25% – 4.5%, which means we begin an easing cycle in 2023. If this plays out, we will be looking at 450 basis points of tightening over a year-long period, which is an aggressive cycle historically.

In 1994, the Fed took up the target rate 275 basis points over the course of a year, which blew up the MBS market (and took out a bunch of mortgage arbitrage hedge funds). From 2003 through 2006, the Fed took up the Fed Funds rate by 400 basis points and blew up the residential real estate bubble. The Fed is banking hard on continued strength in the labor market to soften the blow here, which is comparable to the Volcker tightenings of the early 1980s.

Above is a chart of the Fed Funds rate historically. I extended the line to take into account the projected increases. As you can see, we have done a lot of tightening in a short period of time.

Pennymac was the first correspondent lender to reduce the its bets on the new conforming limits. They took down their levels from 715k to 700k, and it looks like everyone is following. The August FHFA Home Price index will come out on October 25, which will give us 11 out 12 index points. As of now, the new conforming limit would be 716k.

Credit Suisse has launched a buyback for some of its senior bonds. I am hearing that some correspondents won’t accept AOTs from them, so it looks like the Street might be backing away. If there is one thing that can stop a tightening cycle in its tracks, it is a financial contagion.

34 Responses

  1. One of the few Tom Friedman columns that actually has some good points:


  2. Worth noting:


    • jnc:

      Worth noting:

      It is f’n hilarious. The arrival of 17,000 migrants in a city of 8 million is a “crisis”. A city, mind you, that has actually invited illegal immigrants to move there by declaring itself to be a “sanctuary city”.


      • “Mr. Adams has criticized Gov. Greg Abbott of Texas for failing to coordinate migrant arrivals with his administration and called on him on Friday to quit sending buses to New York and to spread the burden to other cities.”

        Abbott got what he set out to achieve which is the cities declaring “emergencies” in response to migrants arriving in them.

        Of course, the focus is still on De Santis due to his choice of locales.

        This should prove interesting if New York follows through with it:

        “On Friday, city officials said that roughly a third of migrants arriving in the city want to go to other destinations, including many Venezuelan immigrants who have relatives or friends in Florida. Mr. Adams said the city is working to transport those migrants to other cities.”

        Time to play Musical Migrants. They arrive in Texas, bused to New York, then New York buses them to Florida. Where presumably they are then flown to Martha’s Vineyard.


        • Someone should tell Adams that no one is calling up anyone in Texas to “coordinate” migrant arrivals there.

          If Adams denounced his own party’s position on immigration and the enforcement of immigration law, and called for NYC to un-declare itself a “sanctuary city”, I would have a lot more sympathy for him. And so, I suspect, would Abbot. Until then, he’s got no one to blame but himself and his own virtue-signalling Democratic voters.


        • There’s a cognitive dissonance between declaring yourself a sanctuary city and then composing complaining when illegal immigrants come.


  3. Also worth noting:


  4. So strange…yet another 2020 election innovation determined to be illegal.

    Almost makes you question whether the 2020 election really was on the up and up. But I am sure the Jan 6 committee is all over this.


  5. It’s just… chef’s kiss!


  6. Helluva fundraising ploy though, vote for me, I brought us closer to nuclear war!

    No joke!


  7. Even the NYT had to take note:


    • the left has such euro-envy it isn’t even funny. You can fly from LA to SF for $100. There is no way HSR will be able to cover its costs at that price point.


      • This is an impressive disaster even by government standards:

        “When California voters first approved a bond issue for the project in 2008, the rail line was to be completed by 2020, and its cost seemed astronomical at the time — $33 billion — but it was still considered worthwhile as an alternative to the state’s endless web of freeways and the carbon emissions generated in one of the nation’s busiest air corridors..

        Fourteen years later, construction is now underway on part of a 171-mile “starter” line connecting a few cities in the middle of California, which has been promised for 2030. But few expect it to make that goal.

        Meanwhile, costs have continued to escalate. When the California High-Speed Rail Authority issued its new 2022 draft business plan in February, it estimated an ultimate cost as high as $105 billion. Less than three months later, the “final plan” raised the estimate to $113 billion.

        The rail authority said it has accelerated the pace of construction on the starter system, but at the current spending rate of $1.8 million a day, according to projections widely used by engineers and project managers, the train could not be completed in this century.”


      • The fundamental problem with modern progressives and liberal utopia a generally is that the believe the coolness of their ideas is all that’s required to make them work, and that design and planning and engineering and due diligence are all unnecessary wastes of time and products of systemic racism so can be dispensed with.


        • They believe that the world would be like John Lennon’s Imagine if they were able to just get rid of you.


        • Speaking of John Lennon’s Imagine:

          “On John Lennon’s Birthday, a Few Words About War

          Why “pacifists” aren’t “fascifists”

          Matt Taibbi

          Targeted by the hated Richard Nixon administration in 1972, Lennon today would be denounced across the spectrum, thanks to a new, relentless public relations campaign equating peace advocacy with fascism, Putinism, Trumpism, even terrorism. The term fascifist, lifted from the WWII era and an old essay by George Orwell, has been revived and is suddenly very visible on social media.”


        • I find it astounding that the left really wants to get into a war with Putin over Ukraine.


        • Their Rube base believes in the Russia hoax and wants to punish their arch-enemy. It’s weird and gives lie to the idea that the left are a bunch on peace-nicks. Stooges? Yes. Willing to send you to die? Yes.


        • I think they almost view it as a proxy war against Trump.


  8. More of this, please.

    Republican state officials are readying plans to punish woke banks which push anti-fossil fuel policies and adhere to so-called environmental, social and governance (ESG) standards.

    West Virginia announced last week it would bar five major financial institutions, including BlackRock, Goldman Sachs and JPMorgan, from entering into banking contracts with the state treasurer’s office or any state agency. Each of the five corporations had committed to policies limiting commercial engagement with the fossil fuel industry, which paid a whopping $769 million in taxes to West Virginia’s state government.

    “We’re not going to pay for our own destruction, we’re not going to subsidize that,” West Virginia State Treasurer Riley Moore told FOX Business during an interview. “They have weaponized our tax dollars against the very people and industry that have generated them to begin with. That is why we’re pushing back against this ESG movement.”


    • It isn’t just ESG. All of the passive / index funds do this shit too. The managers are compensated for minimizing tracking error, not picking good stocks. Classic B-School agency problem, just with institutional investors and not corporate management. The issues are the same though. They have no incentive to maximize your wealth. Ain’t their money.

      I tell people who oppose ESG shit that if you are putting your 401k into these index funds, that is the cost of that rock-bottom management fee. You have to permit them to virtue-signal on your dime.


      • Even ones like VOO which are supposed to exactly match the S&P 500?


        • Of course. They will vote for every ESG initiative, because it costs them nothing. If the stock underperforms the index, so what? It is in the index and they have to hold 4.27654% of their NAV in that stock.

          They can pass the underperformance onto you. Free virtue signaling.


  9. Interesting Vox piece:

    “The surprisingly high stakes in a Supreme Court case about bacon

    National Pork Producers Council v. Ross asks just how far one state can go to change life in the other 49 states.

    By Ian Millhiser
    Oct 9, 2022, 7:30am EDT ”


    • From the Vox piece:

      But this argument is hard to square with Lawrence v. Texas (2003), the landmark civil rights decision striking down a Texas ban on “sodomy.” Among other things, Lawrence held that “the fact that the governing majority in a State has traditionally viewed a particular practice as immoral is not a sufficient reason for upholding a law prohibiting the practice.”

      To sustain a law, a state must offer a justification that goes beyond “we banned this practice because we think it is bad.”

      Which is a good indication of the just how a-constitutional the reasoning behind Lawrence actually was. Literally very single law that prohibits some kind of behavior is ultimately grounded in nothing more than that “we think it is bad”.


      • And for journalistic deception, this really takes the cake:

        In any event, the Court’s current majority has not shown much sympathy for arguments that judges should be cautious about poking around in policy areas that they barely understand

        The claim links to an article about West Virginia v EPA, which had nothing whatsoever to do with policy (even the Vox article admitted that the policy under question “never took effect, that the Biden administration has no intention of reinstating, and that would have accomplished absolutely nothing even if it had be enforced.”), but instead had to do simply with the Constitutional authority of the EPA to enact regulations.


  10. FYI, I just finished a book called The Psychology of Totalitarianism, but Matthias Desmet. I highly recommend it. Very interesting.

    Here is a relatively short interview with the author, by Bret Weinstein.


  11. COVID is a piker compared to wokeness and anti-racism.


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