Morning report: Weak payroll growth

Vital Statistics:

S&P futures4,5394.2
Oil (WTI)70.240.25
10 year government bond yield 1.33%
30 year fixed rate mortgage 3.05%

Stocks are flattish after a weak jobs report. Bonds and MBS are down.

The economy added 235,000 jobs in August, which was way below the Street expectations of 740,000. It looks like the driver for the miss was leisure and hospitality, which added zero jobs in August, after adding 400k in June and July. Retail also fell, which is surprising given that we should be seeing the boost of seasonal hiring as we head into back-to-school and the holidays. Total nonfarm employment has risen by 17 million since April of 2020, however we are still about 5 million jobs below pre-pandemic levels. The two-month revision was up 134,000 which was a small positive.

The unemployment rate fell to 5.2%. The labor force participation rate was flat at 61.7% and the employment-population ratio ticked up 0.1% to 58.5%. Average hourly earnings rose 0.6% MOM and 4.3% YOY. This was again well above Street expectations, but I suspect the surprises in leisure / hospitality and retail hiring were playing a part in the numbers.

Overall, it looks like the Delta variant is depressing leisure and hospitality hiring, which makes perfect sense. It is still hard to reconcile the lack of job growth in that sector with all the “help wanted” signs out there. The labor market of the last year has been an anomaly to say the least.

The punch line is that I think we will see the Street (and the Fed) begin to take down Q3 GDP numbers, and I wouldn’t be surprised if the Fed Funds Futures begin cutting their probability estimates for a rate hike next year.

I doubt that the jobs report will affect the tapering decision, and I think the Fed will gradually begin to cut its purchases of mortgage backed securities. While MBS spreads widened significantly during the 2013 taper tantrum, I don’t think that is in the cards this time around. I think in 2013 the market expected that the Fed might sell its holdings into the market. That isn’t going to happen this time around – heck the Fed decided that even letting the portfolio run off naturally was having too big of a negative effect on the economy. So I think they will gradually reduce purchases and will almost assuredly re-invest maturing proceeds back into the market.

Where does that leave interest rates? The Fed’s projected path of inflation and interest rates was based on an assumption that economic growth would accelerate into the end of the year and through 2022. Given the economic data we have been seeing, that doesn’t seem to be materializing. If we decelerate and begin having recession fears, I suspect the 10 year yield will fall and during the next recession we will join our brethren like German and Japan in the subzero club.

The housing market is becoming slightly more favorable to buyers, as soaring prices are decreasing demand. “The housing market has clearly become slightly more favorable to buyers,” said Redfin Chief Economist Daryl Fairweather. “Homes are taking longer to sell, which gives buyers more time to make thoughtful decisions about whether to make offers. Home prices have plateaued, so buyers shouldn’t feel rushed to buy before prices rise further. And the fact that more sellers are dropping their list price is a sign that sellers have to be realistic about their price expectations.”


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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