Morning Report: Lots of labor data

Vital Statistics:

 

Last Change
S&P futures 2723 12.25
Eurostoxx index 364.42 2.24
Oil (WTI) 64.81 -0.46
10 year government bond yield 3.16%
30 year fixed rate mortgage 4.89%

 

Stocks are higher this morning after yesterday’s end of month window dressing. Bonds and MBS are down again.

 

The ADP report showed the US economy added 227,000 jobs in October, which is well ahead of the Street estimate for Friday’s BLS report. There was a big (typically seasonal) increase in transportation and retail, although professional / business services was strong as well. Mark Zandi, chief economist of Moody’s Analytics, said, “The job market bounced back strongly last month despite being hit by back-to-back hurricanes. Testimonial to the robust employment picture is the broad-based gains in jobs across industries. The only blemish is the struggles small businesses are having filling open job positions.” Large and medium sized employers (50 employees +) accounted for the lion’s share of new jobs.

 

ADP jobs report

 

With added employees comes added employee cost. The Employment Cost Index rose 0.8% QOQ and 2.8% YOY. The wage component of employment costs rose 2.9% while the benefit portion rose 2.4%. The drop in healthcare costs is helping wages as higher healthcare costs of consumed a lot of employee raises. Your cost of healthcare ate your cost of living raise.

 

Mortgage Applications decreased 2.5% last week as purchases fell 2% and refis fell 4%. Rates held steady. “The 30-year fixed-rate mortgage held steady over the week, but total applications decreased overall. Purchase applications inched backward from the previous week, as well as compared to one year ago – the first year-over-year decline in purchase activity since August,” said Joel Kan, AVP of economic and industry forecasts. “Purchase applications may have been adversely impacted by the recent uptick in rates and the significant stock market volatility we have seen the past couple of weeks. Additionally, the ARM share of applications increased to its highest level since 2017, but since this is a compositional measure, it was driven by a greater decrease in applications for fixed-term loans relative to the decrease in ARM applications.”

 

The Challenger and Gray job cut report rose last month, but it is a third-tier employment data point. It focuses on job cut announcements, which may or may not happen.

 

The homeownership rate rose 64.4% according to the Census Bureau. This was up 0.1% from the second quarter and 0.4% from a year ago. The homeownership rate has been ticking up, although the big jump in homeownership from 1994 to 2005 was partially driven by aggressive social engineering out of Washington and probably was artificially high.

 

homeownership rate NAD

Morning Report: Tough times in mortgage banking

Vital Statistics:

Last Change
S&P futures 2840 0.75
Eurostoxx index 388.33 -0.84
Oil (WTI) 69.29 0.8
10 Year Government Bond Yield 2.95%
30 Year fixed rate mortgage 4.58%

Stocks are flat this morning on no real news. Bonds and MBS are flat as well.

The week after the jobs report is invariably data-light and this week is no exception. We will get inflation data on Thursday and Friday and JOLTS data tomorrow and that is about it.

Everyone knows that 2018 has been an awful year for mortgage banking. How bad is it? Check out the graph below courtesy of Garrett Macauley:

mortgage banking profitability

The one thing that jumped out at me (aside from the -8 basis points this year) is how little the industry made during the bubble years. Is it as simple as saying the mortgage business lives and dies on the refinance business and even in great purchase markets (like 04-06) mortgage banking is a marginal activity at best?

If you are tired of hearing predictions of an inverted yield curve, check this out. Jamie Dimon thinks the 10 year bond yield should be 4% right now, and is saying that 5% is a possibility. “I think rates should be 4 percent today,” Dimon said from the gala, according to Bloomberg News. “You better be prepared to deal with rates 5 percent or higher – it’s a higher probability than most people think.” While it is impossible to rule that forecast out, take a look at the chart below: Interest rate cycles are long and during periods of low inflation they just don’t move around all that dramatically.  It took rates 20 years (1946 – 1966) to go from 2% to 5%. What was inflation in 1966? 5%. With the core CPI sitting at 2%, a 5 handle on inflation seems pretty unlikely. Not saying it is impossible – lots of differences between the mid 20th century and today – but….

100 years of interest rates

Chinese buying has been supporting prices in some big West Coast markets, and it is drying up. While trade war concerns are probably playing a role, we are seeing declines in other global real estate markets, like London and Vancouver. This is a signal that the issue is probably internal to China, which has a real estate bubble of its own. The government has issued regulations limiting the purchase of foreign property, and seems worried about the currency. If the Chinese real estate bubble bursts, expect to see more selling in West Coast markets because that will be the only way for Chinese investors to raise cash.