Morning Report: Reassuring jobs report.

Vital Statistics:

 

Last Change
S&P futures 2915 4.25
Oil (WTI) 52.60 0.14
10 year government bond yield 1.53%
30 year fixed rate mortgage 3.84%

 

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

 

The economy added 136,000 jobs in September, versus Street expectations of 145,000. August’s number was revised upward by 38,000 to 168,000. The unemployment rate fell to 3.5%, which is the lowest in 50 years. The labor force participation rate was flat at 63.2% and the employment-population ratio ticked up to 61%. Average hourly earnings were flat on a MOM basis and up 2.9% YOY.

 

Overall, it confirmed that we are seeing a bit of a deceleration in the economy, although we are nowhere near a recession. The Fed Funds futures are handicapping a 75% chance of a 25 bp rate cut at the October meeting at the end of the month.

 

If the unemployment rate is at a 50 year low, we can pretty much dismiss the recession talk as the press generating alarmism to capture eyeballs, right? Not necessarily. We have had recessions in the past with unemployment rates this low. Take a look at the chart below. It plots the unemployment rate and the Fed funds rate. The vertical shaded areas are recessions. You can see that we hit 3.5% unemployment in 1969 and entered a recession soon thereafter. You can see the cause of that recession however in the Fed Funds rate, which went from 4% to 9% in the two years leading up to it. Similarly, we had a recession in 1973 – 75 even though unemployment was in the mid 4% range immediately prior. That one was caused by the Arab Oil Embargo. That said, you can see that most recessions are preceded by a tightening cycle out of the Fed, and that explains why the Fed is now cutting rates – they worry they might have overshot.

 

unemployment vs fed funds

 

As home prices increase, many homeowners are considering renovation loans (like 203k or HomeStyle) to increase the value of their house. What are the best renovations, in terms of return on investment? Hint: not a swimming pool. It is a new roof. What about kitchen renovations? Homeowners can expect to recoup about 50% – 60% of the cost in increased home value. Same with bathroom upgrades and master bedrooms. It turns out that mundane upgrades (wood flooring, insulation, roofing) provide more bang for the buck than the more dramatic ones.

 

 

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