payrolls – The Daily Tearsheet

Morning Report: Blowout jobs report

Vital Statistics:

	Last	Change
S&P futures	3148	22.25
Oil (WTI)	57.99	-0.44
10 year government bond yield		1.85%
30 year fixed rate mortgage		3.94%

Stocks are higher after a blowout jobs report. Bonds and MBS are down.

Jobs report data dump:

Nonfarm payrolls up 266,000
Unemployment rate 3.5%
average hourly earnings up 0.2% MOM / 3.1% YOY
Employment-population ratio 61%
Labor force participation rate 63.2%

Huge surprise in payrolls given the ADP report only had 67,000. The unemployment rate of 3.5% is the lowest in 50 years. About the only blemish was the small downtick in the labor force participation rate. Note that manufacturing payrolls increased smartly.

What does this mean for the bond markets? Nothing since the Fed is on hold, probably through the 2020 election. It also might mean that the rate cuts of earlier this year are beginning to take effect and the drag from the 2018 tightening cycle is behind us.

Note that the makeup of the 2020 FOMC voting members will be more dovish than 2019. Eric Rosengren and Esther George – two hawks that dissented against rate cuts – rotate off the board next year. In their place, we will be getting Neel Kahskari and Robert Kaplan. Neel Kashkari is considered one of the most dovish members of the FOMC. Will it make much of a difference? Probably not, although the bar for increasing interest rates will be adjusted upward accordingly.

Interesting chart: the median age of US homebuyers since 1980. It has increased from 32 to 47 over that period. Half of that increase came from the Great Recession. Much of this is explained by the muted presence of the first time homebuyer, who has been about 30% of sales as opposed to their historical 40%.

Morning Report: ADP reports weak payroll growth.

Vital Statistics:

	Last	Change
S&P futures	3104	13.25
Oil (WTI)	57.39	1.54
10 year government bond yield		1.75%
30 year fixed rate mortgage		3.91%

Stocks are higher this morning on trade optimism. Bonds and MBS are flat.

Mortgage Applications fell 9.2% last week, which contains an adjustment for the Thanksgiving holiday. Purchases increase 1% while refis dropped 16%. Despite the 30-year fixed rate remaining unchanged at 3.97 percent, mortgage applications fell last week, driven down by a 16 percent drop in refinances. Purchase applications were up slightly but declined 24 percent from a year ago. This week’s year-over-year comparisons were distorted by Thanksgiving being a week later this year.”

The economy added 67,000 jobs in November, according to the ADP Employment report. The markets are looking for 180,000 new jobs in Friday’s employment situation report, so there is a big disconnect. “In November, the labor market showed signs of slowing,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “The goods producers still struggled; whereas, the service providers remained in positive territory driven by healthcare and professional services. Job creation slowed across all company sizes; however, the pattern remained largely the same, as small companies continued to
face more pressure than their larger competitors.”

Realtor.com forecasts the 2020 market. Punchline: more of the same, where there is strong demand for housing and supply remains low primarily because builders are reluctant and boomers are content to age in place. “After the housing crash in 2008, which wiped out quite a few builders, those who remained have largely focused on higher-end developments with bigger profit margins. Although they’re finally showing signs of a shift toward building more entry-level homes, faced with overwhelming demand, it will take a few years for a significant number to come to market.”

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.