Morning Report: Strong ADP number

Vital Statistics:

Last Change
S&P futures 2818 1.75
Eurostoxx index 389.71 -1.9
Oil (WTI) 67.7 -1.06
10 Year Government Bond Yield 2.99%
30 Year fixed rate mortgage 4.62%

Stocks are higher this morning after good earnings from Apple. Bonds and MBS are down.

Japanese government bonds got shellacked overnight, with yields rising 8 basis points, which is causing reverberations throughout global bond markets. 8 basis points is a lot in one day regardless, but when rates were only 5 bps to begin with, it is quite the move.

Donald Trump threatened more tariffs with China. We seem to be going back and forth between detente and escalation.

The FOMC announcement is scheduled to be released at 2:00 pm EST. No changes in rates are expected, however the action will be in the statement and the interpretations for a December hike. While Trump’s criticism of the Fed’s rate hikes was unfortunate, things have been testier between the Central Bank and the Executive branch in the past. LBJ shoved William (take away the punch bowl just as the party is getting going) McChesney up against the wall in the Oval Office.

Mortgage Applications fell 2.6% last week as purchases fell 3% and refis fell 2%. We saw a 7 basis point increase in conforming rates to 4.84%. The government share of mortgages increased.

The private sector added 219,000 jobs in July, according to the latest ADP report. The Street is looking for 190,000 in Friday’s report, but as always, the bond market will be looking more at average hourly earnings than the headline payroll number. Construction added 17,000 jobs, while business services added 47,000 and healthcare added 49,000.

ADP jobs report

Manufacturing decelerated slightly in July, but continued to its torrid pace. As expected, much of the talk is about steel tariffs and when those costs will get passed on to consumers. Labor is becoming a bottleneck as well – it is causing capacity constraints.

Construction spending fell 1.1% in June (which missed estimates) and is up 6.5% on a YOY basis. Resi construction was down on a MOM basis, but increased 8.7% on an annual basis.

Morning Report: Awaiting the Fed

Vital Statistics:

Last Change
S&P futures 2652 0.25
Eurostoxx index 387.17 2.14
Oil (WTI) 67.45 0.19
10 Year Government Bond Yield 2.99%
30 Year fixed rate mortgage 4.55%

Stocks are flat as we await the FOMC decision. Bonds and MBS are down small.

Mortgage Applications fell 2.5% last week as purchases fell 2% and refis fell 4%.

The economy added 204,000 jobs last month according to the ADP Employment Report. This was higher than expectations and is above the Street estimate for Friday’s jobs report. Medium sized firms (50-500 employees) added the most jobs, and Professional and Business Services sector had the most growth. Construction added a lot of jobs as well.

ADP by sector

The FOMC announcement is scheduled for 2:00 pm EST today. No changes in rates are expected, but investors will be looking to see if the Fed changes its language about inflation running below target. The latest PCE index came in at 2%, which is the Fed’s target. The second-order question will be to see whether the Fed changes their 2% rate from a symmetric target to a ceiling. The most likely outcome will be a “steady as she goes” statement and any changes will be communicated at the June meeting with a fresh set of economic forecasts. Today’s announcement should be a nonevent.

The Fed Funds futures are predicting a 6% chance of a hike at the May meeting and a 94% chance of a 25 basis point hike at the June meeting.

The labor shortage is so acute in the Rust Belt that some towns are paying people to move there. Most of these small towns have a major demographic problem – younger workers moved to the cities in response to the Great Recession, leaving only the older workers who are now retiring. The fear is that labor shortages will prompt employers to leave, which will create a downward spiral.

Consumer advocates worry that Mick Mulvaney is not going to blow up the CFPB, but will neuter it with a thousand cuts. That said, the rhetoric from the left is a bit overblown. Mick Mulvaney said: “When I took over, we had roughly 26 lawsuits ongoing,” he told the House Appropriations Committee on April 18. “I dismissed one, because the other 25 I thought were pretty good lawsuits.”