Stocks are flattish this morning on no real news. Bonds and MBS are flat.
The private sector added 38,000 jobs in August according to the ADP Employment Report. This was below the 48,000 street estimate and the 55,000 expected for Friday’s jobs report. Education and health services added 45,000 jobs, while construction increased 12,000 and leisure / hospitality rose 16,000. Manufacturing fell, as did professional and business services.
Pay increases moderated to 3.2% from 3.3% the prior month. Job stayers were steady at 3% while job changers fell from 4.8% to 4.7%.
“Pay can tell us a lot about today’s choppy hiring. To understand hiring patterns, you have to look deeply into where pay growth is accelerating, where it’s slowing, and for whom. Once-predictable wage growth has been overtaken by the complexities of demographic change, persistent inflation, and AI’s effects on jobs.”
The ADP report is consistent with the Fed’s assessment of the labor economy: slow hire / slow fire.
The manufacturing economy decelerated in August according to the ISM Manufacturing Report. New orders and production readings declined relative to July, but remained solidly in expansion territory. Prices were flat compared to July, indicating inflation remained unchanged. “In August, U.S. manufacturing activity remained in expansion territory, though it has lost ground in a number of key measures — namely, the New Orders, Backlog and Imports indexes. Of the five subindexes that make up the PMI®, the only one that grew faster than last month was Supplier Deliveries (up 0.4 percentage point), indicating a continuing slowdown of the supply chain.
“In August, 42 percent of the comments were positive and 58 percent negative, with a 1-to-1.4 ratio of positive to negative sentiment. Pricing volatility was mentioned in 57 percent of negative comments, the Iran war 30 percent, increasing lead times 46 percent and tariffs 29 percent. (Most comments mentioned multiple factors.)
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As anyone who hedges their pipeline knows, volatility is the enemy of margin. Big moves in the markets can depress loan bids and make hedges underperform. Swaptions provide a way to buy some insurance against that risk. If you are hedging your MSR portfolio or Non-QM loans for sale, SOFR swaptions may be a good fit.
Exchange traded swaptions also have the benefit of no upfront premium, no counterparty risk, and better execution than a over-the-counter (OTC) option. In an OTC transaction, you contact a bank who will “take the other side” of your trade. So they can sell you an expensive option and then buy it back cheaply when you want to exit since they know your position (or “which way you are”). On an exchange, you will get better pricing because the counterparties are anonymous and have no knowledge about your position.
Contact John Douglas at www.erisfutures.com to learn more.
The CME has an article discussing exchange-traded SOFR swaptions, which are options on Eris SOFR Swap Futures. It is a good backgrounder on how they work, what the advantages of them are, and talks about how you don’t need to be a huge bulge bracket bank anymore to take advantage of them. Lower margin requirements are also helpful for mortgage banks who need to maintain maximum liquidity.
The article is an excellent backgrounder for those who want to learn more about how these instruments are traded. Anyone thinking about hedging non-QM and MSR positions should take a deep dive and understand the possibilities.
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Job openings fell to 7.27 million in July, which was below expectations. Health care and social assistance saw the biggest increase in openings while professional and business services saw the biggest decline. The quits rate fell from 2.0% to 1.9%. A low quits rate indicates that workers are concerned about the economy and reluctant to switch jobs.
Mortgage applications rose 0.8% last week despite mortgage rates hitting the highest level in a month. Purchase applications rose 2% while refis fell 1%. “Mortgage rates reached their highest levels in four weeks as investors’ concerns about inflation and growing deficits push yields higher across the globe,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Refinance volume dropped in response, but purchase volume increased modestly over the week and was slightly below last year’s level. In many local markets, potential buyers have plenty of homes to choose, and this is likely supporting transaction volume.”
