Stocks are flattish this morning after a good jobs report. Bonds and MBS are down.
The economy added 162,000 jobs in August, which was well above the Street estimate of 55,000. The unemployment rate was steady at 4.1%. June and July payroll estimates were revised upward by 55,000 in total, turning July’s job losses back positive.
Food and drinking establishments added the most jobs while employment in IT fell. Average hourly earnings rose 0.3% MOM and 3.1% YOY. The labor force participation rate rose .2% to 61.6% and the employment-population ratio increased 0.2% to 59.1%.
In the establishment survey, it looks like the number of people employed rose by 569,000. The labor force itself increased by 683,000, which was driven by 551,000 people leaving the “not in labor force” category. This implies many long-term unemployed people found jobs last month. If so, this is an encouraging sign for the economy.
I don’t know that this changes anything for the September FOMC meeting, but the rebound in payrolls and the revision should quell any fears about the labor market weakening.
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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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Nonfarm productivity rose 1.4% last month as output increased 1.7% and hours worked rose 0.3%. Unit labor costs rose 1.2%, driven by a 2.6% increase in compensation and a 1.4% increase in productivity.
If AI is helping make us more productive, it has yet to really show up in the data:
Fed Governor Chris Waller said that he is seeing signs that inflation is beginning to move back towards the Fed’s target and if next week’s CPI report confirms it he will be inclined to hold rates steady.
“The short version is that, while inflation remains meaningfully above the Federal Open Market Committee’s (FOMC) 2 percent goal, recent data suggest we are finally seeing some signs of disinflation. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting.”
Note these things on non-market services:
“Inflation is elevated significantly above the FOMC’s 2 percent goal and has exceeded that target for five and a half years. In July, prices based on personal consumption expenditures (PCE) rose 0.2 percent, and core prices excluding food and energy increased 0.2 percent. While I was happy to see this monthly number for core inflation because it continued the pattern of lower monthly readings that we saw earlier in the year, what caught my eye in the last PCE report is that nonmarket services prices accounted for approximately half of the increase in core prices. As you are probably aware, I don’t like throwing out specific categories going into the estimate of PCE inflation, but nonmarket services prices have always been an issue for me, since they are imputed and not actual price changes.3 So, ignoring this one factor, my take is that underlying inflation is doing better than the core numbers suggest.”
“One factor that I expect will lower reported inflation a bit is a pending change in the way the Commerce Department estimates the fees paid to stock market traders and related professionals. That change in this “nonmarket” price estimate, which I expect to be made shortly, could lower 12-month PCE inflation by a few tenths of a percentage point. Given my issues with nonmarket services prices, this is a welcome measurement correction.”
FWIW, I am surprised that stock trading commissions are influencing inflation that much. Stock trading commissions have fallen to almost nothing (Robinhood is free) and algorithms are fighting for a tenth of a penny front-running these orders. The idea that something essentially free is driving inflation by a few tenths of a percentage point is baffling to me.
Waller’s comments in reference to “nonmarket services” also includes shelter inflation, which I believe has been overestimated for a while. Shelter inflation includes something called owner’s equivalent rent, which is a rental estimate for your home. Shelter inflation has been running at 3% plus for the past year:
The Case-Shiller Home Price Index has been increasing by about 1.5% annually for the past year:
Average asking rents are up about 0.5% YOY depending on the source you use. Regardless, 0.5% rental inflation and 1.5% home price appreciation are somehow translating into 3.1% shelter inflation, which implies something is off in the way BLS is calculating it.
