Stocks and bonds are higher after a disappointing jobs report. Bond investors were clearly leaning short in a big way going into the report. The 10 year was trading above 3% before the report, but has moved back down to 2.89%
The jobs report was relatively weak, although the headline unemployment number dropped to 7.3% from 7.4%. Payrolls increased 169k, lower than the 180k the Street was looking for. The prior two months were revised down by a total of 74k. The unemployment rate dropped from 7.4% to 7.3%, while the labor force participation rate dropped to 63.2% from 63.4%. For those keeping score at home, the last time the labor force participation rate was that low, “Miss You” by the Rolling Stones was the #1 song on the hit parade. Weekly earnings rose .2% while weekly hours ticked up by 6 minutes. Overall, a disappointing report.
Where does this report leave us with tapering QE? Since the default path is to start tapering, and some of the other reports are showing strength, I would expect the Fed to make at least a symbolic decrease in purchases, probably in Treasuries and not MBS.
1972 – Just before midnight, amidst the backdrop of the twentieth Olympic games, 9 Israeli Olympic athletes are massacred on the tarmac at the Munich airport after a botched rescue attempt turns into a firefight between their Palestinian captors and German security forces. The athletes, most of them members of the Israeli wrestling team, had been taken hostage (2 others were killed) by members of the terrorist organization Black September after the terrorists had sneaked into the Olympic Village and stormed the Israeli apartment complex in the early morning hours. After an initial demand for the release of some 230 prisoners held in Israeli prisons, a day of negotiations is played out in front of a worldwide television audience of millions. Eventually the attackers request a plane to take them to Cairo, a request ostensibly granted by German authorities, who prepare to ambush the attackers after transporting them to an air base in helicopters. The plan, to the extent there really was one, goes drastically awry when security forces posing as airplane attendants take it upon themselves to abort the mission, thus tipping off the terrorists to the trap. In the ensuing firefight, the terrorists turn their fire on the bound hostages in the helicopter, and then toss a grenade into it, incinerating anyone who was still alive.
1836 – Sam Houston is elected as the first president of the Republic of Texas. A year earlier Houston had been appointed to be a military commander of the Texas army during the nascent movement to establish Texas independence from Mexico. Under Houston’s leadership the Texas army had recovered from a disastrous defeat at the Alamo in early 1836, and had gone on to defeat the Mexican army, capturing its general Santa Anna in the process. Santa Anna was subsequently forced to sign an armistice granting Texas its independence. Houston actually gets elected as Texas’ president twice, serving from 1836-1838, and then again from 1841-1844. He would go on to serve as a Senator in the US congress after helping Texas gain admission as state in the US in 1845.
1774 – In response to the passage of the Coercive Acts, more locally known as the Intolerable Acts, 56 delegates representing 12 of the 13 colonies (Georgia was unrepresented) gather in Philadelphia for the first ever session of the Continental Congress. It is the first formal act of unified opposition to British rule among the American colonies. The delegates, who will draft a declaration of rights and grievances to be sent to the King, include Patrick Henry, John Adams, and George Washington.
Markets are higher this morning after the ADP jobs report predicted 176 private sector jobs were created in August and initial jobless claims came in at 323k. Productivity was higher, while unit labor costs fell. Bonds and MBS are down small.
RealtyTrac is reporting that 10.7 million homeowners are deeply underwater (LTV > 125%), which represents 23% of properties with a mortgage. This number is down from 12.5 million (or 28%) a year ago. Another 8.3 million are in the 90 – 110 LTV range, and if real estate prices continue their recent appreciation, this could bring the supply / demand dynamics back into equilibrium as these homes gain equity and become available for sale. Lack of inventory has been a problem in the market and has been distorting some of the repeat-sales indices as professionals and cash buyers compete for the few homes that are available. Needless to say, this is welcome news for originators as it would boost purchase activity as refis dry up.
Washington Post has a quick and dirty on what a Summers Fed would look like. Punch line: not a lot different than a Bernanke Fed, at least as far as policy is concerned. So far, it looks like Summers is Obama’s first choice.
Yesterday’s Fed Beige Book didn’t have much new to say. Eight districts reported moderate growth while 5 reported modest growth. Residential real estate activity increased moderately, while lending activity was mixed. Lending standards were largely unchanged, while credit quality improved. Hiring and wages increased modestly.
1972 – US swimmer Mark Spitz helps his team win the medley relay in a record setting time, thus winning his 7th gold medal at the Munich Olympic games, setting a record that would last for 40 years. Spitz also set new world records in each of the other 6 events in which he won the gold. His tally of 7 golds will remain a record until 2012 when Michael Phelps took home 8 at the Beijing Olympics.
1957 – The Edsel, the first new car brand to be introduced by one of the Big 3 motor companies in 20 years, and perhaps the most infamous flop in car manufacturing history, is presented to the public by the Ford Motor Company. Veiled in secrecy, Ford had hyped the new car with a marketing campaign that showed only the hood ornament and promised simply “The Edsel is coming.” But when it was finally unveiled, the public was not impressed. Coming amidst a changing economic landscape, the car was too big and too expensive, and had a myriad of technical problems, including a hood ornament that tended to fly off on the highway. After only 3 years, and a loss of $250 million, the Edsel division folded.
1886 – The Indian wars of the American southwest effectively come to an end when Geronimo, the last remaining warrior chief to organize resistance to US forces, surrenders. Geronimo is sent to reservations first in Florida and then in Louisiana, finally ending up in Oklahoma, where he converted to Christianity, became a successful farmer, and even participated in Theodore Roosevelt’s inaugural parade.
Should be a slow day with not much economic data and the Jewish holiday. Mortgage applications rose 1.3% last week. bonds and MBS are flat
Construction spending rose .6% last month and is up 5.2% year over year. Residential construction is up .6% month over month and 17.2% year-over-year. We are definitely seeing signs of life in the homebuilding sector, although the first time homebuyer is getting a bit of sticker shock from the higher rates. Pulte noted on their 2Q conference call that buyers at the lower price points (read the first time homebuyer) are backing away a bit. Toll Brothers (which is in the McMansion business) reported that the luxury homebuyer is unfazed by higher rates.
CoreLogic reported that home prices increased 12.4% year over year and and now within 18% of their April 2006 peak. Every state reported a year-over-year increase in prices if you exclude distressed sales. While they predict that August’s increase will be similar to July’s, they anticipate the appreciation to stall as seasonal demand wanes and people start to feel the effects of higher rates. As usual, the hardest hit states are reporting the strongest recoveries.
Yesterday’s ISM report showed strength in manufacturing. While manufacturing isn’t the driver of the economy that it used to be, it still matters quite a lot. The reading of 55.7 corresponds to a GDP growth rate of over 4%. Unfortunately, while manufacturing output is up quite a bit, manufacturing employment is not. Auto sales are up around the 16MM range, which is approaching pre-crisis levels. The average US car is around 11 years old, so we are due for a upgrade cycle. That will be bullish for the economy.
2004 – A three-day hostage crisis in a school in the town of Beslan, Russia comes to a violent end when a gun battle between Russian security forces and the hostage takers erupts following an explosion. Three days earlier Chechen terrorists had surrounded and then taken over the school, holding some 1,200 children, parents and teachers, who had been celebrating the first day of school, in the school gym. The gym was then rigged with explosives as the terrorists demanded a Russian troop withdrawal from Chechnya. On the third day of the siege, an explosion in the gym, which witnesses later say was accidentally set off, sparks a firefight between the terrorists and security forces. By the time it is over, 31 of the 32 terrorists are dead, along with 331 of the hostages, including 186 children.
1783 – America is officially recognized as an independent nation with the signing of the Treaty of Paris, formally ending the American Revolution. The last major battle of the Revolution had ended two years previously with the surrender of British General Cornwallis to French and American troops, but final peach negotiations had continued throughout 1782 and 1783. The final agreement granted America its independence as well as granting all lands from Florida to the Great Lakes and between the Atlantic and the Mississippi to the US, essentially doubling its size.
Markets are stronger after a return from the long Labor Day weekend. While a short week, we will have all sorts of important data, with Friday’s jobs report the most important. Risk-on feel, as stock index futures are rallying and bonds / MBS are getting hit.
Friday’s jobs report will probably answer the September vs December question. If it is strong, the next questions will concern the actual amount and distribution of the cuts. The consensus seems to be that the Fed will reduce purchases by $10 billion a month. Will that be all Treasures, a mix of Treasuries and MBS, or all MBS? While I don’t think there is any chance the Fed will choose to do all MBS, there is a chance they could do all Treasuries. And that would be mortgage-rate positive.
Is the Syrian situation market-moving? It has the potential to be market-moving if it spreads to other countries in the Middle East, but on its own, probably not. Any sort of strike by the US will be limited and no one envisions sending troops in. The only real worry is if it drives oil higher, and that will affect Asia more than us.
The MBA Independent Mortgage Banker Report showed average profit per loan decreased to $1,528 (75 bp) in the second quarter from $1,772 (86 bp) in the first quarter. While overall volume was flat, per-loan production costs continue to rise, and we are seeing pricing pressures.
I’ve always been rather partial to Labor Day. When I was a kid we started school the Tuesday after. It was sort of summer’s Last Hurrah. The kids here have already been in school for two weeks. The pool’s exceedingly pleasant right now though and it’s been hotter and muggier than any other time this summer so we’re lighting up the barbeque and enjoying one more swim party with the kids and a few neighbors. We brought back smoked albacore and salmon yesterday from one of our favorite restaurants in Carlsbad. Walter’s barbequing ribs for the meat eaters and I’m making a fancy pasta salad and barbequed corn and of course watermelon and homemade peach ice cream. Everyone brings their own drinks and so I never know how wild things will get. Tomorrow I start working on last years taxes……………boo hoo.
1969 – Chemical Bank in Rockville Center, New York introduces the automated teller machine to its customers, the first ATM to appear in the US. ATM’s will go on to alter the face of personal banking across the world, and have become an indispensable feature to every day life.
1959 – Responding to the increasing appeal of smaller imported cars, Ford introduces the Falcon, its first compact, fuel efficient car dubbed “the small car with the big car feel”. Priced at only $1,900, the car is a huge hit, with dealers ordering 97,000 of the cars on the first day alone, and more than 2 million of them are sold in its first two years. My dad had a Falcon when I was a kid.
1945 – Aboard the USS Missourri, Japanese Foreign Minister Mamoru Shigemitsu and General Yoshijiro Umezu of the Imperial Army formally sign unconditional surrender documents, officially ending World War II. The surrender ceremony in color.
1985 – The R.M.S. Titanic is discovered on the ocean floor 12,000 feet below the surface of the Atlantic by an expedition headed by Robert S. Ballard. Ballard is actually on a secret mission chartered by the US Navy to locate and photograph two sunken nuclear submarines, the USS Thresher and USS Scorpion. Using the search for the Titanic as a cover story, Ballard is allowed to search for the remains of the ship after having located the two submarines. Scanning the ocean floor with an unmanned submersible sub named Argo, Ballard discovers one of Titanic‘s massive boilers, which leads to the wider debris field and eventually the ship itself.
1939 – One week after signing the Molotov-Ribbentrop Pact, a non-aggression treaty between Germany and the Soviet Union, World War II begins when Germany invades Poland. The move prompts both Britain and France to declare war on Germany two days later, and the Soviets will join in the invasion of Poland by mid-September, effectively splitting the nation between Germany and the Soviets. Despite Germany’s defeat 6 years later, it will be 50 years before Poland will regain its independence from the Soviet Union.
1864 – In one of the most decisive battles of the Civil War, Union forces under the command of William Tecumseh Sherman capture Atlanta, an important supply hub for the South. The battle for the city had begun in May, and it will remain occupied by Union forces until November 15 when Sherman leaves the city in ruins and begins his infamous March to the Sea.