Morning Report: Wage pressures building

Vital Statistics:

Last Change
S&P futures 2872 -8.25
Eurostoxx index 373.62 -1.89
Oil (WTI) 67.66 0.12
10 year government bond yield 2.97%
30 year fixed rate mortgage 4.62%

Stocks are lower this morning on trade and weather fears. Bonds and MBS are continuing their post jobs-report sell-off.

Job openings hit a record high in July, hitting 6.9 million, according to the JOLTS survey. Job openings increased in finance and insuring, but fell in retail and government. The quits rate increased to 2.4%, the highest level since 2001.

Small business optimism set a record last month, hitting 108.8 and beating the previous high set in July 1983. The number of businesses saying it is a good time to expand hit a high, and plans for capital expenditures and inventory investment also hit pre-crisis highs. The NFIB index had a discontinuous jump upward starting in late 2016, but that was primarily driven by expectations of hiring and investment. Now the index is being driven higher by actual hiring and investment and that is driving GDP growth. Labor shortages continue to be a problem.

Same store sales continued their recent strength, rising 6.3% last week. All of this points to a strong Q4.

Signs of building wage pressures? Leaders for the United Steelworker’s Union are demanding pay increases as steelmakers get a profit boost from tariffs. They are targeting US Steel and Arcelor Mittal. Steel prices are up 30% – 40% this year, which is boosting profits. This issue of course is that these increases will probably prove to be temporary as the tariffs are a negotiating tool. That said, expect to see more of this as the labor market tightens. US Steel has offered the union a 4% wage increase next year, and 3% the following two years. After that, base pay will increase by 1%, but profit-sharing bonuses will be implemented.

Finally, a note on 9/11

I was on the trading floor at Bear, Stearns in London. It was just after lunch. A headline went across Bloomberg saying a plane had hit one of the WTC towers. CNBC mentioned the story as well, but no one was thinking “terrorism.” I emailed one of my friends at Merrill Lynch (right across the street at the World Financial Center) and he wasn’t even aware of what happened. The European markets were down a bit on the day, but didn’t really react to the first hit.

After a few minutes, CNBC started showing live footage of the fire and then we saw plane 2 hit. Immediately, the world realized what had happened. The Euro markets were collapsing and I was inundated with sell orders. The news of the Pentagon hit came out. People on our floor started freaking out. We were in Canary Wharf (One Canada Square) in the tallest building in the UK. Planes routinely come close to the building as they approach City Airport. The head of Bear Stearns Europe came on the trading floor and told everyone if they were uncomfortable, to go home. No one knew if today was “fly a plane into financial headquarters day” Everyone bailed, and I was one of the last guys on the trading floor, trying to reconcile my book by hand and get flat before I left.

I looked up at CNBC before I left and saw the place I got married at a year earlier collapse on my birthday.

P.S. As I headed to the tube to go home, I passed the Slug and Lettuce (a pub) and found all of the “uncomfortable” Bear Stearns employees having a pint directly below the building they were so uncomfortable being in.

By the way, I am still searching for a senior capital market role at a mortgage bank. If anyone is hearing of anyone looking, I would appreciate the head’s up.

Morning Report: Number of job openings equals number of unemployed

Vital Statistics:

Last Change
S&P futures 2747 1.75
Eurostoxx index 388.56 0.45
Oil (WTI) 64.56 -0.19
10 Year Government Bond Yield 2.91%
30 Year fixed rate mortgage 4.54%

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

Job openings continue to creep upward, hitting 6.7 million in April, which is just about the number of unemployed people in the country. Job openings increased in manufacturing, but fell in finance. The quits rate was flat MOM at 2.3% and is up about 20 bps since last year. The quits rate is a strong predictor of wage inflation, as it measures people leaving jobs to take new, higher paying ones. Below is a chart of the quits rate versus wage growth. Wage inflation is a bit more volatile, but the correlation is pretty tight.

quits rate

The ISM non-manufacturing index rose in May to 58.6. The current level historically corresponds to a GDP growth rate of around 3.5%. Tariffs are weighing on many sectors however.

The House Financial Services Committee will hold a hearing tomorrow to discuss transparency and accountability at the CFPB. This hearing is the result of a memo from Mick Mulvaney, which recommended that the CFPB be subject to Congressional appropriation, that major rules be passed by legislation, that there be an independent Inspector General, and recommended that the agency report to the President.

Home prices rose 1.2% in April, according to CoreLogic. On a YOY basis, they are up 6.9%. They expect home price appreciation to moderate over the next year and increase about 5%. Much of the country’s real estate is becoming overvalued, according to CoreLogic’s model – in fact, over half. The valuation metric is based on incomes, which is why an expensive market like San Francisco may appear fairly valued, while areas on the Gulf Coast may seem overvalued.

Corelogic overvalued

The first time homebuyer accounted for almost half the Freddie Mac purchase market, the highest since 2012, when Freddie first started tracking this statistic. The Bloomberg headline is terrible – the first time homebuyer does not account for almost half of mortgages. 40% are refis and the first time homebuyer is about 32% of existing home sales.

Over the past 2 years, about 4.4 million jobs have been added in the US. How many houses have been built? 2.4 million. Great illustration of just how acute the housing shortage is.