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.

 

ADP report

 

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.”

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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.

 

ADP report

 

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).

 

JOLTs

 

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.

Morning Report: The Fed’s balance sheet will probably never return to pre-crisis levels.

Vital Statistics:

 

Last Change
S&P futures 2896 -2.5
Eurostoxx index 388.12 0.58
Oil (WTI) 64.46 0.06
10 year government bond yield 2.52%
30 year fixed rate mortgage 4.16%

 

Stocks are flattish this morning on no real news. Bonds and MBS are down small.

 

Factory Orders fell 0.5% in February, while January was revised downward to no change. Core Capital Goods Orders (which is a proxy for business capital expenditures) fell 0.1% after unusually strong readings in January and December.

 

Small Business Optimism increased in March, according to the NFIB Small Business Optimism Survey. Hiring indicators improved (companies added .5 workers on average), the earnings outlook brightened, and capital expenditures were steady. The only negative was an inventory build.

 

House flipping is back to pre-crisis levels. Profit margins are much higher however, which should provide a bit of a cushion if home price appreciation tails off. The type of property is generally older – a fix and flip – which is dominated by professionals, not neophytes. Those were the type who would purchase rights to buy a new construction condo and then hope to sell the right at a profit.

 

Margin compression and lower volumes has meant job losses in the nonbank mortgage sector. Nonbank lenders employed 320,000 people in February, which is a drop of about 20,000 jobs from August.

 

30+ day delinquencies fell to 4% in January, which is a drop from 4.9% in January of 2018. The foreclosures rate fell to 0.4% from 0.6%. Delinquency rates fell across the entire spectrum of buckets, and are at the lowest levels in 20 years. Interestingly, DQ rates for student loans and auto loans are up.

 

Good explainer on quantitative easing and why the Fed doesn’t want to return to pre-crisis levels for its balance sheet. Changes in the way banks manage their reserves, along with rising global demand for dollars has made a larger Fed balance sheet a necessity. The mechanics of rate setting involve setting the interest they pay on bank reserves, and in order to do that, they need a large level of reserves in the banking system. These reserves are the Fed’s liabilitites, and if the liabilities need to increase, the assets will have to move up in lockstep. Hence the need to maintain a bigger balance sheet.

 

Note that the equity value of the Fed’s balance sheet is largely unchanged, which means the Fed is vulnerable to a fast uptick in interest rates. This is because rising interest rates will negatively affect the value of its bond portfolio (bond values fall as rates rise). The Fed has about $3.9 billion in assets, supported by $39 billion in equity. In other words, a 1% drop in their asset portfolio would wipe out their equity. While that is a distinct possibility for their long-term bond holdings, it is highly unlikely for their short term bond holdings. That said, the Fed does operate with a 100:1 leverage ratio and historically that level has been deadly for institutions that don’t own a printing press.

 

Federal Reserve Assets

 

 

 

 

Morning Report: Disappointing ADP print

Vital Statistics:

 

Last Change
S&P futures 2883 13.25
Eurostoxx index 384.71 1.04
Oil (WTI) 62.04 0.65
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.17%

 

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

 

ADP reported that the private sector created 129,000 jobs in March. Education and health reported the biggest increase, while the financial sector and the construction sector cut jobs. The Street is looking for 170,000 new jobs in Friday’s employment situation report. The Street will look at the payroll number, but the more important one is the average hourly earnings number. The Street is forecasting a 0.3% MOM and 3.4% YOY gain.

 

Construction spending rose 1% in January, and is up 1% on an annual basis. Residential construction rose 1% on a MOM basis, but is down 3.6% YOY. Construction spending was probably affected at least somewhat by the partial government shutdown at the end of last year / beginning of this year.

 

The manufacturing sector continues to do well, with the ISM Manufacturing Index hitting 55.3 in March. New Orders, Production, and Employment were the drivers of the increase. I found this comment interesting: “Business remains very strong amid rumors of a slowdown, but forecasts do not indicate this. Electronics are at tight capacity from manufacturers, with no [change] in the near future.” (Transportation Equipment) The transportation sector touches most parts of the economy, so it has always been the equivalent of the canary in a coal mine. But overall, this report isn’t showing any signs of economic weakness.

 

Durable Goods orders however did show some weakness. Durable Goods orders fell 1.6% in February, however they were up slightly when you strip out the volatile transportation sector. Core Capital Goods (a proxy for business capital expenditures) fell slightly. January’s numbers were revised upward, so the report isn’t as bad as it initially appears.

 

Ron Wyden wants your unrealized capital gains to be taxed every year. This is more or less an Overton Window widening exercise and has a less than zero percent chance of gaining mainstream Democratic support, let alone Republican support. He would also increase the capital gains tax to 37%. It would be like the government assessing you every year on the increase Zillow reports for your home and sending you a bill for 37% of it. The final plan will probably exempt your primary residence, but still – it would force you to sell investments you may not want to sell in order to pay the tax.

 

Further, in the political space, Elizabeth Warren is taking a victory lap after Wells Fargo CEO Tim Sloan’s retirement. She is pushing for laws to make it easier for the government to prosecute corporate executives who don’t have firsthand knowledge of crimes their subordinates are doing.

 

That was quick: After a big open on Friday, Lyft is now trading below its IPO price. The big gains seem to be reaped pre-IPO anymore, when the company is revalued at each funding round. By the time it hits the IPO phase, it is priced for perfection. Remember, Blue Apron, which went public at $10 a share during the summer of 2017? It is now a drill bit.