Morning Report: Fed Day

Vital Statistics:

 LastChange
S&P futures3,860-5.75
Oil (WTI)88.37-0.14
10 year government bond yield 4.05%
30 year fixed rate mortgage 7.05%

Stocks are lower as we await the Fed decision. Bonds and MBS are flat.

The Fed decision is due today at 2:00 pm. The market expects to see a hike of 75 basis point, and there won’t be any new dot plot of set of projections. Jerome Powell will hold a press conference at 2:30 pm.

The economy added 239,000 jobs in October, according to the ADP Employment Report. The vast majority of the jobs were added in leisure / hospitality and trade / transportation. Manufacturing jobs fell. “This is a really strong number given the maturity of the economic recovery but the hiring was not broad-based,” said Nela Richardson, chief economist, ADP. “Goods producers, which are sensitive to interest rates, are pulling back, and job changers are commanding smaller pay gains. While we’re seeing early signs of Fed-driven demand destruction, it’s affecting only certain sectors of the labor market.

The number that jumped out at me was the increase in wages. From the report: “Job changers continued to record double-digit, year-over-year pay increases, but momentum in those gains is ebbing. For these workers, annual pay growth edged down for the third straight month, to 15.2 percent in October from 15.7 percent in September. For job stayers, pay gains were 7.7 percent, in line with recent months.”

This report seems way out of step with other reports on wage gains. FWIW, the market sees average hourly earnings increasing 4.7% in Friday’s jobs report, which is a far cry from the 7.7% reported here. Also this seems out of step with the employment cost index as well. If this report is true (especially for job stayers) then wage are more or less keeping up with core inflation (ex-food and energy).

Mortgage applications fell 0.5% last week as purchases fell 1% and refis fell 0.2%. The refi index is down a whopping 85% compared to a year ago. “The 30-year fixed rate decreased for the first time in over two months to 7.06 percent, but remained close to its highest since 2002,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “Apart from the ARM loan rate, rates for all other loan types were more than three percentage points higher than they were a year ago. These elevated rates continue to put pressure on both purchase and refinance activity and have added to the ongoing affordability challenges impacting the broader housing market, as seen in the deteriorating trends in housing starts and home sales.”

Home price appreciation decelerated in October, according the the Clear Capital Home Data Index. Overall home prices rose 0.5% quarter-over-quarter, and 12.6% on a year-over-year basis. Prices are beginning to soften dramatically on the West Coast, with areas like Seattle and the Bay Area falling in the mid-to-high single digit range. Rising prices and quality of life issues are causing people to exit these MSAs, and home prices are reacting accordingly.

Interestingly, the Northeast (which really missed this whole rally over the past few years) is beginning to exhibit decent growth. Places like Hartford CT and the NYC metro area were among the leaders. Florida remains the biggest beneficiary of migration as cities like Miami, Orlando and Tampa exhibited 25%+ growth.

Author: Brent Nyitray

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

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