Morning Report: ADP and BLS differ by a country mile 4/6/18

Vital Statistics:

Last Change
S&P futures 2642 -19
Eurostoxx index 374.5 -1.62
Oil (WTI) 63.07 -0.44
10 Year Government Bond Yield 2.80%
30 Year fixed rate mortgage 4.43%

Stocks are lower after Trump announced more tariffs against China. Bonds and MBS are flat.

Jobs report data dump:

  • Payrolls up 103,000 (below expectations)
  • Unemployment rate 4.1% (above expectations)
  • Labor Force Participation Rate 62.9% (increase of 0.1%)
  • Average Hourly Earnings up 0.3% / 2.7% (in line with expectations)

Another month where the ADP number (increase of 241k) and the BLS number (increase of 103k) were a mile apart. Weather may have played a part in the low payrolls number, as the Midwest and East Coast were hit by a number of snowstorms that knocked out power early in the month. Construction employment fell, which kind of supports that theory. Wage inflation remains in check for the most part. The employment-population ratio was flat at 60.4%. Overall, a disappointing report, but the weather makes me want to put an asterisk next to it.

The NFIB reports that almost a third of small businesses raised wages to attract and / or retain employees last month, which was the highest percent since 2000.

Forget about the old picture of the Rust Belt – decaying small towns that peaked in the 1950s and crashed during the 1970s. Things have changed. When you think of Detroit, you now think of Quicken Loans, and places like Elkhart Indiana are unable to keep $90,000 SUVs in stock because the town is booming with factory workers making $68,000 on average. At full production, workers are making $90k, and foremen are making 6 figures. The unemployment rate is basically zero – a town of 50,000 people has 9.500 unfilled job openings. Despite what some economists think about employers having market power and exhibiting monopsonist behavior (hard to believe dozens of employers in a single locality could collude), the laws of supply and demand do in fact apply to the labor market.

CFPB Acting Director Mick Mulvaney responded to Elizabeth Warren’s letter that posed about 100 questions about how the agency is being run. Suffice it to say, she believes the agency isn’t being aggressive enough. Mulvaney’s response was basically to say that he doesn’t have to respond, and doesn’t intend to. “When I served on the House Committee on Financial Services as a Member of Congress, I was frequently frustrated with what I perceived to be a lack of responsiveness, transparency and accountability at the Bureau,” Mulvaney wrote. “I encourage you to consider the possibility that the frustration you are experiencing now, and that which I had a few years back, are both inevitable consequences of the fact that [the Dodd-Frank Act] insulates the Bureau from virtually any accountability.” The saga continues..

Donald Trump announced plans for another $100 billion in tariffs against China last night, and China responded with plans to retaliate. As of now, this is still in the trash-talking phaseLarry Kudlow says negotiations haven’t even begun yet.

Treasury has issued a set of recommendations for modernizing the Community Reinvestment Act. Probably the biggest change would be to move the focus from where bricks and mortar branches are to where the banks actually lend. This would bring the law up to date with the concept of less branches and more online banking. The other recommendation is to bring in more standardization and more certainty into what the government is looking for in examinations. In other words, make the law less arbitrary.

Morning Report: Jamie Dimon discusses the state of affairs 4/5/18

Vital Statistics:

Last Change
S&P futures 2660 13.5
Eurostoxx index 373.93 6.6
Oil (WTI) 63.22 -0.16
10 Year Government Bond Yield 2.81%
30 Year fixed rate mortgage 4.41%

Stocks are higher this morning on no real news. Bonds and MBS are down.

Initial Jobless Claims increased to 242k last week. Job cuts also jumped to 60k from 30k according to outplacement firm Challenger, Gray and Christmas. Retailers (probably Toys R Us) drove the increase. This is the biggest jump in 2 years.

JP Morgan CEO Jamie Dimon discusses the state of the economy in his annual letter to shareholders. He argues with normal growth and inflation around 2% (the current state of affairs) historically, we would expect to see short-term rates around 2.5% and the 10 year trading around 4%. He argues that QE (both here and abroad) is what is suppressing the 10 year yield. That will reverse for the Fed this year, and in the near future overseas. There will be some countervailing forces at work, but we are in such uncharted territory that no one knows how it will turn out. Dimon then starts discussing the surprise 1979 rate hike (100 basis points on a Saturday!) and talks about how the Fed Funds rate then opened 200 bps higher that Monday. Just for the record, I want to put this chart out there – interest rate cycles are long. We are probably a generation (or two) from that sort of situation again, at least if historical observations are any guide.

100 years of interest rates

Dimon makes another point in his letter about the state of the financial system. On one hand, it is much more stable and well-capitalized. Money market funds have higher restrictions, and there is much less leverage in the system overall. That said, post-crisis policy has removed the counter-cyclical levers in the financial system. First of all, the Volcker rule has meant less market-making. Investors have noted that it is much harder to trade securities, especially the less liquid ones. In a downturn, expect to see many securities go no-bid. In other words, investors will be stuck riding something down. Second, the newer bright lines means that banks will not be able to use their reserves to step in and lend. In Reminiscences of a Stock Operator, there was a credit crunch and banks were fully lent out to the reserve point. J.P. Morgan exhorts the banks to use their reserves. That is what they are for! And finally, in a swipe at the Obama Administration, the big banks are not going to agree to buy out the failing ones. JP Morgan bought Bear at the height of the crisis, as a favor to the Bush Administration. The Obama Admin then slammed them with fines for all of Bear’s sins.

We aren’t going to see much in the way of inflation without wage growth, and at least one economist (Noah Smith) is arguing that we aren’t seeing any because employers have too much market power. He also argues that minimum wage laws are not job killers, at least in the aggregate, despite what Econ 101 would say. His argument is that if employers do have market power, then they are earning a higher return than they would otherwise accept on their workforce. In other words, you could force them to hike wages, and they still will make enough that it won’t make sense to fire people. He then cites the usual Rx for increasing wages: higher minimum wage laws and more unions. The question is then where employers have market power. Perhaps in one-company towns that could be the case. But en masse? Possible, but not probable.

The trade deficit increased again in February, giving ammo to those who agitate for a trade war. A trade war could have an effect on interest rates. Right now, China sends us ships of stuff (phones, plastic goods, all sorts of things). In return (they aren’t giving it away), they have to take something. Right now, they largely take things like agricultural products. We would prefer it if they bought even more stuff. Since they aren’t, the get US dollars instead, which they then invest in Treasuries and other US assets. If trade decreases with China, they will theoretically buy less Treasuries, and that would mean higher interest rates, at least at the margin. To put this in perspective, the trade deficit with China in February was $29 billion. During QE, the Fed was buying $45 billion in Treasuries and MBS a month. So that isn’t chump change.

It is important to understand that we are in a negotiation phase with China, that many of these things are just proposals. Historically, these things get solved by a meaningless pledge that allows the US to claim victory, but doesn’t really make that much of a difference. As China gets richer, it will undoubtedly purchase more US goods and services. However, the savings rate is sky-high there – which means that consumption is low. They are in building mode.

Ginnie Mae has noted the abuses in VA IRRRLs and is taking action against some lenders. New Day and Nations Lending are no longer eligible to issue securities into multi-issuer pools. They will only be able to issue spec pools, which will trade at a discount.

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.

Morning Report: CoreLogic: Half of MSAs are overvalued 4/3/18

Vital Statistics:

Last Change
S&P futures 2589 14
Eurostoxx index 368.88 -2
Oil (WTI) 63.15 0.14
10 Year Government Bond Yield 2.76%
30 Year fixed rate mortgage 4.41%

Stocks are rebounding after yesterday’s bloodbath. Bonds and MBS are down small.

No economic data today. Neel Kashkari speaks at 9:30 this morning.

The replacement for LIBOR begins trading today, when the New York Fed begins listing its new Secured Overnight Financing Rate. The NY Fed will also publish a couple other rates: the Broad General Collateral Rate and the Tri-party General Collateral Rate. Details can be found here. The appeal of SOFR will be that it is based on arms-length transactions and not quotes from banks that may or may not be real.

Prepayment speeds collapsed in early 2018 as rates rose, according to Black Knight Financial Services. Prepayment speeds are generally a proxy for refi activity, which has dried up as more of the refi opportunities are out-of-the-money. From this point onward, refi activity will be driven by home price appreciation more than interest rates. As home prices rise, the opportunity will be cash-outs, FHA with MI to conventional without MI, and ARMS into 30 year fixed. As the yield curve flattens, the relative decrease in the monthly initial ARM payment decreases.

Home equity topped $5.4 trillion last quarter and beat the record set in 2005. 75% of that is in mortgages that are out-of-the-money, or below the current 30 year fixed rate mortgage.

Home Prices rose 1% in February and are up 6.7% YOY, according to CoreLogic. They are forecast to be flat in March and up 4.7% YOY. Much of the torrid growth has been in the West / Mountain states, especially WA, NV, ID, and UT. Affordability has fallen and home price appreciation is expected to slow going forward. About half the MSAs are now overvalued, as home price appreciation and mortgage rates have outstripped income growth.

Morning Report: Trade tensions and construction employment 4/2/18

Vital Statistics:

Last Change
S&P futures 2633 -10
Eurostoxx index 370.87 1.61
Oil (WTI) 64.92 0
10 Year Government Bond Yield 2.77%
30 Year fixed rate mortgage 4.45%

Stocks are lower this morning after investors come back from the long Easter weekend. Bonds and MBS are up.

The big event will be the jobs report on Friday. The Street is looking for 167,000 jobs, which seems small, however weather-related effects in the Northeast and Midwest are undoubtedly driving some of that. The consensus for wage growth is 0.2% MOM and 2.7% YOY. This number is the one that matters the most as far as the bond market. Until the report bonds will probably take their cue from the equities market, zigging when stocks zag.

Inflationary pressures can come from strange places. In the US, spot trucking freight rates are up 28% as driver shortages and new technology limit hours. So far, retailers and producers have not passed this cost on to consumers, but at some point they will. Even long-term rates, which are more stable than spot rates, are up 12%. Note that this is with moderate diesel prices – it isn’t fuel driven.

Trade tensions with China are increasing, as the Chinese imposed some restrictions on US agricultural exports which kick in today. China is urging more trade talks to prevent further damage. A trade war will have a push-pull effect on the US economy: on one hand, higher tariffs on imported goods will increase inflation, however trade wars also act as a damper on economic activity which should keep the Fed at bay. Since inflation remains well below the Fed’s target I suspect they will focus more on the depressing effects on a trade war than they will on the potential inflationary pressures of one.

The Fed studied how student loan debt impacts homeownership and found that as student loan debt increases, the person’s likelihood of owning a home decreases. This shouldn’t be much of a surprise, but it does show that the increase in salary from having a college education isn’t offsetting the increase in debt, at least when you look at debt to income ratios.

For new graduates looking for a job, head to the Midwest. There are more job openings there than there are unemployed workers.

Construction spending increased 0.1% MOM and 3% YOY in February, according to Census. This was a touch below consensus. Residential construction increased 0.1% MOM and 5% YOY.  The National Association of Homebuilders conducted a study on where the construction workers are in the US, and unsurprisingly most of them are out West, where the fastest growth appears to be.

Manufacturing eased slightly in March, according to the ISM report, however it is still quite strong. The potential tariffs are beginning to concern businesses. One quote from the report: “Much concern in the industry regarding the steel and aluminum tariffs recently [imposed]. This is causing panic buying, driving the near-term prices higher and [leading to] inventory shortages for non-contract customers.” (Machinery). Others mentioned it will take a few weeks to gauge the impact of tariffs. That said, the reading of 59.3 is usually associated with real GDP growth pushing 5%, so it is still a strong report despite the decrease.

March 31, 1968.

LBJ announced on national TV and radio that he would not run for President in 1968.

I heard the news with 31 other sailors and marines in the orthopedic ward of Newport Naval Hospital.  I was one of two patients who had not been wounded in combat.  The other was a sailor who had fallen from the mast in a storm.  I had reinjured a herniated disc that I first crushed working in a factory in high school.

The Army had rejected me as 1Y but I thought my back was cured and I passed my somewhat less rigorous Navy OCS physical, for which I volunteered.  Unfortunately I only made it about ten days through OCS when a 4 AM calisthenics workout completely buckled my back sometime between sit-up 72 and 75.  My squad leader, a Stanford PhD, gently kicked me in the ribs and told me to get moving.  I told him I couldn’t even get up.  I was carried to the hospital.

Doctors made rounds in the orthopedic ward on Wednesdays.  Our daily contact was (Nurse) Commander Jensen.  She ordered me to strict bed rest and gave me pain killers.  I couldn’t actually walk.  Had to yell for an orderly to get a bedpan.  One night, maybe the third or fourth, I had to piss at midnight.  I yelled for a bedpan.  The giant Marine sergeant across from me who had one leg blown off  growled “Pipe down, OC.”

I climbed out of bed and crawled on fours to the head, pulled myself semi-erect on the porcelain, and pissed.  I crawled back to my bed.  Commander Jensen was waiting for me.  I don’t know why.  She reminded me brusquely that I had been ordered to strict bedrest.  When I started to respond she pointedly told me that she had not asked me a question.  Then she had an orderly pump me full of something that knocked me out for 30 hours.

The stay at NNH was the closest thing to living in Yossarian’s world I could have imagined.  Second Wednesday on rounds, the Marine sergeant reported a seaman for uncontrollable farting [true] even in the face of having been ordered by the big Marine to control himself.  The seaman was moved out on doctor’s orders and we were told he was moved to Section 8 [psych ward] for evaluation.

Third Wednesday on rounds  a USN Regular doc suggested fusion surgery, but I asked him if traction were available as an alternative because it had worked nine years before.  He told me the surgery was no big deal and moved on.  A trailing doc came over to me and whispered that he was a Reservist and a surgeon.  He whispered “Did that monkey say he wanted to operate?” I nodded.  He said “Don’t let those monkeys touch you.”

When I told Commander Jensen that I refused surgery she came back with forms for me to sign.  Waiver of Vet bennies.  My thought was that because I had passed the OCS physical the Navy could not rely on pre-existing condition.  Well, we all know the Navy wins that one and I had no ability to get to a law book from strict bed rest, anyway.  So eventually I signed the waiver.

On my last Wednesday the docs gave me the going away present of 400+ horse pill sized Darvons in a gallon jug.

Lady Madonna was the most played song on the radio.  Nobody in the ward wanted LBJ to quit.  And that’s how it was 50 years ago this weekend.




Morning Report: Personal Incomes and Spending rise 3/29/18

Vital Statistics:

Last Change
S&P futures 2609 5
Eurostoxx index 370.62 1.36
Oil (WTI) 64.88 -0.37
10 Year Government Bond Yield 2.77%
30 Year fixed rate mortgage 4.45%

Stocks are higher this morning on end of month / quarter window dressing. Bonds and MBS are up.

Stocks are set to break a 9 quarter winning streak. The market leaders – the FAANG stocks – have been taking a beating as Facebook gets hit on data issues, and Amazon finds itself in the Administration’s doghouse.

The bond market will close early today, at 2:00 pm EST. Get your locks in early, as secondary marketing types will probably build in a margin cushion to protect themselves over the long weekend.

Personal Income rose 0.4% in February, while personal spending rose 0.2%. The Personal Consumption Expenditure Index rose 0.2% MOM and 1.8% YOY. The core PCE index (the Fed’s preferred measure of inflation) was up 0.2% MOM and 1.6% YOY. The core PCE numbers were a touch higher than the Street was looking for, and everything else was in line. The savings rate rose. Bonds are rallying a bit on the report.

Initial Jobless Claims fell to 215,000 last week, barely missing the late February number of 210,000. We haven’t seen these levels since the early Carly Simon’s “Your’e So Vain” topped the charts. When you take into account population growth the number is even more dramatic.

The FHFA announced that Fannie and Freddie will be issuing a new uniform mortgage backed security beginning in June of 2019. “The transition to the new, common security requires planning, investment, and preparation by a wide variety of market participants,” said FHFA Director Melvin L. Watt. “We have now set the specific date that the Enterprises will start issuing the UMBS and I urge the industry to get ready now to ensure smooth, successful implementation.” This will help bring Fannie and Freddie pricing more in line with each other.

Is fintech reaching parts of the market that have not been fully served by traditional banks and lenders? The Philly Fed finds some evidence that it does, particularly in areas where there is high lender concentration (i.e. only a few banks) and areas that don’t have much in the way of banks.

Barclay’s Bank agreed to pay $2 billion in civil penalties to settle an investigation concerning RMBS issued during the bubble years. “In general, the borrowers whose loans backed these deals were significantly less credit-worthy than Barclays represented,” the Justice Department said in a statement Thursday. Barclay’s had committed to keep the settlement under $2 billion in 2016, but the Obama Justice Department balked.

A Reuters poll of 75 bond strategists suggests that fears of oversupply in the Treasury market are overblown. They are looking for an increase of 40-50 basis points in the 10 year bond yield in 2018. Considering that we are already up 30 basis points this year, we probably aren’t looking at major increases from here – maybe we will find a range of 2.8% to 3% and bounce around.

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