Morning Report: Strong wage growth in December

Vital Statistics:

 

Last Change
S&P futures 2480 32.75
Eurostoxx index 338.85 4.35
Oil (WTI) 48.05 0.95
10 year government bond yield 2.61%
30 year fixed rate mortgage 4.43%

 

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

 

Jobs report data dump:

  • Nonfarm payrolls up 312k, street expectation 177k
  • Average hourly earnings up 0.4% MOM / 3.2% YOY, street expectation 0.3% / 3.1%
  • Labor force participation rate 63.1%, November 62.9%
  • Unemployment rate 3.9%, street expectation 3.7%

Overall a strong report. The uptick in the unemployment rate was a surprise, but is still below 4% and the labor force increased by quite a bit. Wages are increasing smartly, rising 3.2%. Those in the press (and DC) hoping for recessionary data will be disappointed with this report.

 

Yesterday, we touched 2.57% on the 10 year bond yield. If you were hoping to see that reflected in mortgage rates, you were probably disappointed. MBS are lagging the move in Treasuries (as usual).

 

The action in the Fed funds futures is truly astounding. There has been a complete sea-change in market perception over the past month. Look at the January 2020 futures (a year from now). Implied probability of another hike in 2019? Zero. Chance of a rate cut? Better than 50/50. Note the implied probabilities a month ago versus today. The market is saying the Fed overshot.

 

fed fund futures dec 2019

 

Compare that to the dot plot from the December meeting which suggests another 50 basis points of hikes:

 

dot plot

 

This is an astounding change in sentiment in just a month. It is certainly possible that the Fed Funds futures have it wrong, but it is clear the market and the Fed aren’t seeing the future even remotely the same.

 

Chinese demand is collapsing, as evidenced by falling consumption tax receipts. People have known that China has a real estate bubble and a shaky banking system for a while, but bubbles generally go on for longer than anyone ever expects. With the Chinese pulling out of the hot US markets, we are seeing a decline in places like Manhattan, where the median apartment price fell below $1 million for the first time in 3 years. There is a 16 month supply of luxury apartments in Manhattan, compared to an overall 4.5 month supply of existing homes for sale in the US. 6.5 month’s worth is generally considered a balanced market. The same thing is happening in the hot West Coast markets.

 

Kathy Kraninger, the new head of the CFPB sent an email to staffers saying that the agency will “continue to vigorously enforce the law,” but keep in mind “costs and benefits” and “maintain an open mind, without presumption of guilt.” So, she sounds like a continuation of the Mick Mulvaney approach and not a return to the Cordray “regulation by enforcement” model.

 

Mr Cooper bought IBM’s $48 billion servicing portfolio.

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Author: Brent Nyitray

Why do you need new bands? Everyone knows rock attained perfection in 1974. It's a scientific fact. - Homer Simpson

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