Morning Report: Payrolls shrink in December

Vital Statistics:

S&P futures4,57136.2
Oil (WTI)89.551.33
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.77%

Stocks are higher this morning after Alphabet (Google) reported strong numbers. Bonds and MBS are flat.

Private payrolls fell 300k in January, according to the ADP Employment Report. The Street is looking for positive 200k in Friday’s Employment Situation Report, so this is a sizeable miss. The Omicron Variant was the big driver of the decline.

“The labor market recovery took a step back at the start of 2022 due to the effect of the Omicron variant and its significant, though likely temporary, impact to job growth,” said Nela Richardson, chief economist, ADP. “The majority of industry sectors experienced job loss, marking the most recent decline since December 2020. Leisure and hospitality saw the largest setback after substantial gains in fourth quarter 2021, while small businesses were hit hardest by losses, erasing most of the job gains made in December 2021.”

Mortgage Applications increased 12% last week as borrowers rushed to complete refinances ahead of the expected increase in borrowing rates. Purchases rose 4% while refis rose 18%. “Despite the increase in rates, refinance applications were up 18 percent, driven mainly by a 22 percent jump in conventional applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “There has likely been some recent volatility in application counts due to holiday-impacted weeks, as well as from borrowers trying to secure a refinance before rates go even higher.”

Loan Depot reported disappointing earnings, as volumes fell 22% on YOY basis and gain on sale margins contracted 106 basis points. EBITDA fell 88%. The company did increase its market share and the servicing book increased by 57% on a YOY basis.

Home Prices rose 18.5% in December, according to CoreLogic. The company expects home price appreciation to take an abrupt halt, with prices expected to rise only 3.5% this year. Frank Nothaft, Chief Economist of CoreLogic had this to say: “Much of what we’ve seen in the run-up of home prices over the last year has been the result of a perfect storm of supply and demand pressures. As we move further into 2022, economic factors – such as new home building and a rise in mortgage rates – are in motion to help relieve some of this pressure and steadily temper the rapid home price acceleration seen in 2021.”

Regarding home prices, the rise in mortgage rates will definitely crimp affordability, however wages are also rising. IMO the supply-demand imbalance is so stark, it will take years of above-average housing starts (think 2.5 to 3 million units) to make a dent. Last year, we did something like 1.6 million starts, which is about what we did in 1959, when the population was a little more than half of what it is now. We have a long way to go.


Author: Brent Nyitray

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

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