Morning Report: Strong jobs report

Vital Statistics:

S&P futures3,7636.75
Oil (WTI)89.841.38
10 year government bond yield 3.86%
30 year fixed rate mortgage 6.74%

Stocks are higher this morning after the jobs report. Bonds and MBS are down.

The economy added 263,000 jobs in September, which was above the Street estimate of 250,000 and the ADP estimate of 208,000. The unemployment rate fell to 3.5% and average hourly earnings increased 5% The labor force participation rate fell to 62.3% as the labor force shrank.

Overall, this report won’t move the needle for the Fed either way. The reaction in the bond market was a slight sell-off, with a continued inversion of the yield. curve. The Fed Funds futures still see a 75 basis point hike in November, and another 50 in December. Looking into 2023, it looks like we are seeing another 25 basis points before the March 2023 meeting, and that is it. So we peak out at a range of 4.5% – 4.75%. This comports with what Chicago Fed President Charles Evans said yesterday.

Interestingly, the futures see the December 2023 rate at 4.25% – 4.5%, which means we begin an easing cycle in 2023. If this plays out, we will be looking at 450 basis points of tightening over a year-long period, which is an aggressive cycle historically.

In 1994, the Fed took up the target rate 275 basis points over the course of a year, which blew up the MBS market (and took out a bunch of mortgage arbitrage hedge funds). From 2003 through 2006, the Fed took up the Fed Funds rate by 400 basis points and blew up the residential real estate bubble. The Fed is banking hard on continued strength in the labor market to soften the blow here, which is comparable to the Volcker tightenings of the early 1980s.

Above is a chart of the Fed Funds rate historically. I extended the line to take into account the projected increases. As you can see, we have done a lot of tightening in a short period of time.

Pennymac was the first correspondent lender to reduce the its bets on the new conforming limits. They took down their levels from 715k to 700k, and it looks like everyone is following. The August FHFA Home Price index will come out on October 25, which will give us 11 out 12 index points. As of now, the new conforming limit would be 716k.

Credit Suisse has launched a buyback for some of its senior bonds. I am hearing that some correspondents won’t accept AOTs from them, so it looks like the Street might be backing away. If there is one thing that can stop a tightening cycle in its tracks, it is a financial contagion.


Author: Brent Nyitray

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

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