jobs – The Daily Tearsheet

The jobs report says the recession ended last month

Vital Statistics:

	Last	Change
S&P futures	3173	64.1
Oil (WTI)	38.84	0.39
10 year government bond yield		0.92%
30 year fixed rate mortgage		3.29%

Stocks are higher this morning after the jobs report showed the economy added jobs in May. Bonds and MBS are down.

Jobs report numbers:

Nonfarm payrolls rose by 2.5 million.
Unemployment rate fell to 13.3%
Average hourly earnings up 6.7% YOY
Labor force participation rate 60.8%

The message from this report is that the economy turned the corner in May and the recovery has begun. Street expectations for this report were way off. The average forecast for payrolls was a loss of 7.7 million jobs, and the forecast for unemployment was 19.8%. The average hourly earnings numbers are interesting. They were down 0.1% MOM, but up 6.7% YOY. I suspect that the higher paid furloughed workers were brought back first, and now we will see the lower paid workers return as retail and restaurants re-open.

The big takeaway from the jobs report is that the recession probably ended last month. I expect to see big upward revisions in the Q2 economic forecasts.

Black Knight reported that the number of loans in forbearance fell slightly last week. “After rising sharply in April and then leveling off toward the end of May, the number of American homeowners in forbearance plans has now decreased for the first time since the crisis began,” said Jabbour. “There were a net 34,000 fewer homeowners in forbearance as of June 2. The decline was actually greater among government-backed mortgages, which saw 43,000 fewer total forbearance plans than last week, but this was partially offset by an increase of 9,000 new plans on mortgages held in bank portfolios and private-label securities.”

Invitation Homes (a single family home REIT) reported that it collected 97% of historical rent in May, so despite the scary numbers from the survey about New York City rent, the rest of the country seems to be doing much better.

The jobs report sent bonds lower, with the 10 year trading around 0.9%. After such a huge move in the long bond, a retracement was to be expected. That said, mortgage rates might not go anywhere as aggregators fight for business and mortgage backed security spreads tighten.

Morning Report: How many jobs have we lost due to COVID?

Vital Statistics:

	Last	Change
S&P futures	3096	18.1
Oil (WTI)	36.64	0.39
10 year government bond yield		0.73%
30 year fixed rate mortgage		3.23%

Stocks are higher this morning on evidence that the global economy is recovering from the COVID crisis. Bonds and MBS are down.

The economy lost 2.76 million jobs in May, according to the ADP employment report. This was well above the street estimate of 9 million. The Street is looking for a loss of 7.5 million jobs in Friday’s jobs report, so perhaps we could see an upside surprise there. “The impact of the COVID-19 crisis continues to weigh on businesses of all sizes,” said Ahu Yildirmaz, cohead of the ADP Research Institute. “While the labor market is still reeling from the effects of the pandemic, job loss likely peaked in April, as many states have begun a phased reopening of businesses.”

So, according to AFP, we have lost about 22.7 million jobs over the past 3 months. And, according to initial jobless claims it is over 40 million. And if you take the government’s nonfarm payroll numbers plus Friday’s estimate we get around 30 million jobs lost. Pretty wide variation between estimates. While people have been thinking that initial jobless claims have been undercounted due to computer problems, it is the outlier on job losses. Note that there has been evidence of unemployment fraud.

Mortgage Applications fell 3.9% last week as purchases rose 5% and refis fell 7%. “Purchase applications continued their recent ascent, increasing 5 percent last week and 18 percent compared to a year ago. The pent-up demand from home buyers returning to the market continues to support a recovery from the weekly declines observed earlier this spring,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “However, there are still many households affected by the widespread job loss and current economic downturn. High unemployment and low housing supply may restrain a more meaningful rebound in purchase applications in the coming months.”

The Fed promised to roll out a program to buy corporate bonds as a way to thaw the credit markets back in April. So far, they are getting no takers. It is largely a stigma issue, but also reflects the fact that credit markets have eased up over the past several weeks.

Morning Report: The Fed maintains rates at zero

Vital Statistics:

	Last	Change
S&P futures	2908	-28.1
Oil (WTI)	16.81	3.29
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.43%

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

The Fed maintained interest rates at 0% and pledged to continue to do what it can to support functioning markets, including buying agency mortgage backed securities and treasuries. They didn’t specify amounts, just that they wanted to keep orderly markets. As Dave Stevens noted, it is clear the Fed wants to see lower mortgage rates as a way to stimulate the economy. The problem with that of course is that the CARES Act is doing the exact opposite – it is restricting credit more than what happened in 2008. The MBA’s Mortgage Credit Availability index took a nosedive in March, and I think it will be much, much worse in April.

Flagstar just announced a 5 point LLPA for cash-out refis. It is clear that these are the next program to go bye-bye, joining jumbos, non-QM, and sub 700 FHA. The law of unintended consequences rears its ugly head once again. I wonder if the government could tweak the CARES Act to make cash-outs ineligible for forbearance. That way the program could still exist and provide relief to people hit by COVID. Presumably if you do a cash-out, you have money to live on, so….

Initial Jobless Claims came in at 3.8 million, pushing the COVID job losses over 30 million.

Personal incomes fell 2% in March and personal spending fell 7%. The personal consumption expenditure index remained under control. I suspect that increasing food prices are being offset by lower energy prices.

Mortgage REITs AGNC and Annaly reported yesterday, and needless to say both were hit hard by COVID. Both have completed their deleveraging, and AGNC noted that its book value per share increased by 8% in April, after declining about 22% in Q1. For the agency REITs, it looks like the crisis is over.

Another round of stimulus may be a bridge too far. Nancy Pelosi wants to force states to vote by mail, and that is a non-starter with Republicans. Mitch McConnell wants lawsuit protection for businesses that remain open during the COVID crisis, and that is a non-starter to Democrats. As Travelers noted on its conference call, trial lawyers smell an opportunity here and are ginning up lawsuits as we speak.

Morning Report: Big jump in employment

Vital Statistics:

	Last	Change
S&P futures	3327	23.25
Oil (WTI)	50.88	1.02
10 year government bond yield		1.65%
30 year fixed rate mortgage		3.68%

Another “risk-on” day as stock markets rally overnight and bonds get sold. MBS are performing a touch better than the 10 year.

Mortgage applications hit a six year high last week, which included an adjustment for the MLK holiday. The index rose 5% while refis increased 15%. The refi index is up 183% from the same week a year ago. Purchases fell 10%. “The 10-year Treasury yield fell around 20 basis points over the course of last week, driven mainly by growing concerns over a likely slowdown in Chinese economic growth from the spread of the coronavirus. This drove mortgage rates lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity jumped as a result, with an increase in the number of applications and a spike in the average loan amount, as homeowners with jumbo loans reacted more resoundingly to lower rates.”

ADP reported that payrolls increased by 291,000 last month, a huge jump from December, which was revised upward from 139,000 to 202,000. The Street is looking for an increase of 158,000 nonfarm payrolls in Friday’s jobs report, so that number appears to be too low. There was a pretty big increase in construction workers as it looks like homebuilders are eager to finally fulfill the pent-up demand for housing out there. It looks like the ADP number was the strongest in at least a year

Home prices rose 0.3% MOM in December, and are up 4% on an annual basis according to CoreLogic.

Morning Report: Meh jobs report

Vital Statistics:

	Last	Change
S&P futures	3280	4.25
Oil (WTI)	59.52	0.04
10 year government bond yield		1.85%
30 year fixed rate mortgage		3.88%

Stocks are higher as it looks like hostilities are cooling between the US and Iran. Bonds and MBS are down.

Jobs report data dump:

Nonfarm payrolls + 145,000
Unemployment rate 3.5%
Labor force participation rate 63.2%
Average hourly earnings up 0.1% / 2.9%

Overall a meh report. Nothing special. Manufacturing payrolls fell by 12,000 which sort of meshes with the weak ISM report. Wage growth remains positive but below the sort of levels we were seeing a few months ago.

Initial Jobless Claims fell to 214,000 last week. No other economic data today, but we do have a lot of Fed-speak.

Want to give a compliance officer a heart attack? Go after a negative review on Yelp by trashing the borrower’s credit profile. Mount Diablo Lending was fined $120,000 for doing just that – “Your credit report shows 4 late payments from the Capital One account, 1 late from Comenity Bank which is Pier 1, another late from Credit First Bank, 3 late payments from an account named SanMateo. Not to mention the mortgage lates. All of these late payments are having an enormous negative impact on your credit score.” Note: credit profiles are confidential information, and your company should have procedures to protect it. Getting into a tiff with a declined borrower on Yelp is not a good way of going about that.

Remember when Quicken and United Wholesale got into a pricing war about this time last year? Well, it looks like Quicken just signed a 4 year contract with the NFL to be its exclusive mortgage sponsor. “Over the years we’ve been a brand and a company that likes to do big epic things,” Casey Hurbis, chief marketing officer for Quicken, said in an interview.

Corporate CEOs and consumers have differing views on the economy. CEOs think a recession in 2020 is the biggest risk, while almost all CFOs see the economy slowing next year. If you look at the chart below, CEO confidence is about where it was going into 2009, which quite simply makes no sense.

Morning Report: Strong ADP jobs report

Vital Statistics:

	Last	Change
S&P futures	2963	25.25
Oil (WTI)	56.12	0.14
10 year government bond yield		1.53%
30 year fixed rate mortgage		3.7%

Stocks are up this morning after China and the US supposedly have scheduled an October meeting. Bonds and MBS are down on the risk-on trade.

We have quite a bit of strong data this morning, starting with the ADP jobs report, which came in at 195,000. This was much higher than the 149k the Street was looking for, and the 158k expected for tomorrow’s jobs report. This was the highest number in 4 months. Manufacturing added 8,000 jobs, so we aren’t seeing any sort of trade-driven pull-back in that sector. Construction added 6,000 jobs. Where are jobs shrinking? tech and mining.

Challenger and Gray released their layoffs report, which backed up the ADP report of job cuts in tech. The layoff report is based on press releases, not actual job cuts. US employers announced 53,480 job cuts last month, of which 10,000 were due to trade war issues. That said, most of the job cuts were in retail. “Employers are beginning to feel the effects of the trade war and imposed tariffs by the U.S. and China. In fact, trade difficulties were cited as the reason for over 10,000 job cuts in August,” said Andrew Challenger, Vice President of Challenger, Gray & Christmas, Inc. “We are continuing to see investor concerns shaking confidence in the market, and employers appear to be cutting workers in response to a slowdown in demand for their products and services,” he added.

In other economic data, productivity in the second quarter was unchanged at 2.3% and unit labor costs were revised upward to 2.6%. The Street was expecting a downward revision in productivity. Hourly compensation was revised upward to a 4.9% increase. Initial jobless claims came in at 216k.

We had a slew of Fed-speak yesterday, with a wide range of opinions, from John Williams of the NY Fed avoiding the dovish bent versus St. Louis President James Bullard advocating for 50 basis points. FWIW, the market is virtually unanimous in its forecast of a 25 basis point cut at the September 17-18 meeting.

Despite falling rates and rising home prices, bidding wars for properties hit an 8 year low in August, according to Redfin. “Despite remaining near three-year lows, mortgage rates have failed to bring enough buyers to the market to rev up competition for homes this summer,” said Redfin chief economist Daryl Fairweather. “Recession fears have been enough to spook some would-be buyers from making the big financial commitment of a home purchase. But assuming a recession doesn’t arrive this fall or winter, consumers will likely adjust to the new ‘normal’ of continued volatility in the stock and global markets, and the people who need and want to make a move will take advantage of low mortgage rates. As a result, I still expect homebuying competition to pick back up in the new year.”

Morning Report: Disappointing payroll number

Vital Statistics:

	Last	Change
S&P futures	2819	14.35
Oil (WTI)	53.02	-0.46
10 year government bond yield		2.12%
30 year fixed rate mortgage		4.13%

Stocks are higher this morning after yesterday’s rally continued overnight. Bonds and MBS are flat.

Fed Chairman Jerome Powell said yesterday that the central bank was monitoring the trade tensions between China and the US and would “act appropriately” to maintain the economic expansion. Investors took this to mean that the Fed would probably cut rates this year. The stock market had its best day in 5 months, and bonds sold off a touch, although lower rates should be supported by low overseas yields and the prospect of a rate cut.

Donald Trump announced that he would institute tariffs on Mexican goods if the country didn’t do more to curb illegal immigration into the US. This new front in the trade war was the catalyst to push the 10 year below 2.1%. Yesterday, Republican senators warned that there was not support for tariffs in the Senate.

Mortgage Applications increased 1.5% last week as purchases fell 2% and refis increased 6%. “Mortgage rates dropped to their lowest level since the first week of 2018, driven by increasing concerns regarding the ongoing trade tensions with China and Mexico,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Some borrowers, particularly those with larger loans, jumped on the opportunity to refinance, bringing the index and average refinance loan size to their highest levels since early April. Additionally, refinances for FHA and VA loans jumped by 11 percent.”

Payrolls only increased by 27k last month according to the ADP Employment Report. Small firms reduced payrolls by 52,000 last month, and it looks like the majority of that was in construction. Manufacturing fell by 3,000 which might be tariff related. The service sector increased employment by 71,000 and large employers increased by 68,000. Street expectations are for a 185,000 increase in payrolls for Friday’s jobs report. Now that the Fed is out of the way, the wage growth number is no longer the focus.

Morning Report: VA sends subpoenas to several lenders

Vital Statistics:

	Last	Change
S&P futures	2875	-15
Oil (WTI)	61.27	-0.13
10 year government bond yield		2.43%
30 year fixed rate mortgage		4.17%

Stocks are lower this morning on no real news. Bonds and MBS are up.

Trade fears have been the driver of negative sentiment in the markets this week after Trump tweeted that he is considering increasing tariffs on Chinese goods this week. It turns out that Beijing sent a marked-up agreement that basically reneged on most of their former commitments, which is what drove the response from the US.

There were 7.5 million job openings at the end of March, according to BLS. The quits rate was unchanged at 2.3%. Quits rose in real estate and fell in construction. Job openings are pretty much close to record levels and exceed the numbers we saw in 2000. This is the 13th straight month where the number of openings has exceeded the number of unemployed.

Mortgage applications rose 2.7% last week as purchases rose 4% and refis rose 1%. We saw a good week for the spring home buying season, as a 5 percent increase in purchase applications–both weekly and year-over-year–drove the results,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Average loan amounts also stayed elevated, with government purchase applications rising to the highest in the survey. Even with slower price appreciation in higher-priced markets, home prices are still rising enough to push average loan sizes higher.” The increase in government applications was driven by VA purchase activity. The typical 30 year fixed rate mortgage fell 4 basis points to 4.27%.

Speaking of VA loans, the government has sent subpoenas to at least 8 lenders seeking information regarding delinquencies and prepayments. VA prepay speeds have been an issue for both the government and investors. VA has recently put out a request for input from various stakeholders regarding VA loans and prepay speeds and is considering making some high LTV VA loan ineligible for GNMA multi-issuer pools, which would almost certainly negatively affect pricing.

Newco spelled backwards reported a first quarter loss, due to a negative mark on their MSR book. The mark was probably due more to interest rates than anything else, as both prepayments and delinquencies fell. Yet another instance where investors have loaded up the boat buying MSRs ahead of an expected increase in interest rates, only to see them head back down. This has pretty much been the story for the past several years.

Morning Report: Blowout ADP jobs number

Vital Statistics:

	Last	Change
S&P futures	2945.83	2.3
Eurostoxx index	390.26	-0.72
Oil (WTI)	63.37	-0.27
10 year government bond yield		2.50%
30 year fixed rate mortgage		4.18%

Stocks are higher as we await the FOMC decision. Bonds and MBS are up. Markets should be quiet this morning as most of Europe is closed for May Day.

Today’s Fed decision is set to be released at 2:00 pm. No changes in policy are expected and it should be a nonevent.

Pending Home Sales rose 3.8% in March, according to NAR. Activity increased pretty much everywhere except for the Northeast. Falling mortgage rates have helped boost activity and we are seeing a bit of an improvement in the inventory balance. Pending home sales reached a level of about 5 million, which is the same level as we saw in 2000. We have 50 million more people since then, which means there is a lot of pent-up demand.

The ADP jobs report came in at an increase of 275,000 jobs in April. This was well above the Street expectation of 180,000 for Friday’s jobs report. Professional and business services led the charge, and we also saw an increase in construction employment. The service sector added 223,000 jobs, the biggest increase in two years. With the Fed out of the way, 2019 could be better economically than people were thinking. Note that Trump is still jawboning the Fed to cut rates.

Mortgage Applications fell for the fourth straight week, dropping 4.3%. Purchases fell 4% and refis fell 5%. “Mortgage rates were lower last week, with the 30-year fixed rate declining to 4.42 percent, as concerns over global growth, particularly in Germany, outweighed more positive domestic news on first quarter GDP growth and business investment,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Applications to refinance and purchase a home both fell, but purchase activity still remained slightly above year ago levels. The drop in refinances were driven by fewer FHA and VA loan applications, which typically lag the movement of conventional loans.”

Freddie Mac bumped up its origination forecast for 2019 by 4% to $1.74 trillion as rates have fallen. They expect the 30 year fixed rate mortgage to be 4.3% at the end of the year, and home price appreciation to moderate to 3.5%.

Morning Report: Job openings fall

Vital Statistics:

	Last	Change
S&P futures	2890.5	8
Eurostoxx index	386.66	0.98
Oil (WTI)	64.39	0.06
10 year government bond yield		2.50%
30 year fixed rate mortgage		4.16%

Stocks are higher this morning on overseas strength after the ECB maintained interest rates. Bonds and MBS are up.

The Fed will release the minutes from its March meeting this afternoon at 2:00 pm. Given the magnitude of the shift in their Fed Funds forecasts, it should make interesting reading. There is a chance that it could be market-moving, especially since rates have moved back up.

Inflation at the consumer level rose 0.4% MOM in March, and increased 1.9% YOY. Ex-food and energy, it rose 0.1% MOM and increased 2.0% YOY. Energy prices are increasing again, so expect to see more upward pressure on prices. The 0.4% increase was the biggest in 14 months.

Job openings fell in February by about 500,000. Job openings had a big growth spurt in 2018 and now appear to be pulling back a little. Job openings fell in most sectors, with hotels and accomodation leading. Hiring fell in several sectors as well, including construction. The most important number – the quits rate – was stuck again at 2.3%. The quits rate is a leading indicator for wage growth, and is a number the Fed watches closely. Between the latest payroll numbers and this report, we can see evidence that the labor market is cooling a bit. That said, the number of job openings (7.1MM) are still larger than the number of unemployed (6.2MM).

The IMF cut its forecast for 2019 global growth from 3.5% to 3.3%, with the risks solidly to the downside. “The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”

Mortgage Applications decreased 5.6% last week as purchases rose 1% and refis fell 11%. “Mortgage rates inched back up last week, but remain substantially lower than they were in the second half of last year,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “As quickly as refinance activity increased in recent weeks, it backed down again in response to the rise in rates. However, this spring’s lower borrowing costs, coupled with the strong job market, continue to push purchase application volume much higher. Purchase applications are now up more than 13 percent compared to last year at this time.” Government loans (FHA / VA) increased their share of the market, and the average contract interest rate rose 4 basis points to 4.4%.

The CEOs of major banks head to the House for what promised to be a tongue-lashing from Democrats. Bank of America attempted to head off criticism by raising the minimum wage for its employees. There will almost certainly be kvetching about CEO pay, and the financial system will almost certainly be Enemy #1 for the Democrats running in 2020.