Morning Report: Uncertainty

Vital Statistics:

	Last	Change
S&P futures	3809	17.3
Oil (WTI)	51.67	0.94
10 year government bond yield		1.09%
30 year fixed rate mortgage		2.82%

Stocks are higher this morning despite a pretty lousy jobs report. Bonds and MBS are down.

The jobs report showed a loss of 140,000 jobs in December, which was well below the expected 50,000 gain. The unemployment rate slipped to 6.7% and hourly earnings rose by 5.1% YOY. The labor force participation rate was flat at 61.5%.

Given the riot that happened yesterday in DC, I am surprised to see bonds continuing to sell off. My gut tells me that part of the reason is that the bond market is still adjusting to the surprise result in the GA Senate runoff. Yes, we will get more stimulus which is theoretically inflationary. That said, all of the chaos in DC should be considered bond bullish, and I do think the stock market is in a state of denial. This is setting up for an unfriendly business environment.

As things settle down, I suspect the watchword for the business community will become uncertainty. Uncertainty is the reason for not hiring, not spending, etc. Ultimately, Biden is a bit of a blank screen, and until the business community knows whether we are getting Bill Clinton or Barack Obama’s regulatory state it will choose to sit on its hands. Someone remarked that the DC riot is the left’s 9/11, and they want revenge. An angry left is not conducive to commerce. All you can do is hunker down, play it safe and wait for the storm to pass.

I will be willing to bet that the NFIB Small Business Optimism Index will take a dive the next time it is released. Ultimately, this state of affairs should be considered bond bullish, and I suspect rates will be headed back down. The stock market is still being elevated by the Fed and speculative activity (I read somewhere that 6% of the volume in the market has been in one name: Tesla).

Ultimately, if the economy slows (which seems to be the case), the Fed’s bond purchases will have to stay in place. This means that mortgage rates should have a lid on them for the foreseeable future. While I don’t see a return to the economy of 2009-2010, I do think the pre-COVID economy is probably not in the cards for a long time. This is why I think rates are headed back lower.