Morning Report: Banks pan the SBA loan program

Vital Statistics:

 

Last Change
S&P futures 2517 4.4
Oil (WTI) 28.56 3.29
10 year government bond yield 0.59%
30 year fixed rate mortgage 3.5%

 

Stocks are flattish after the jobs report. Bonds and MBS are flat as well.

 

Jobs report data dump:

  • Nonfarm payrolls down 710,000
  • Unemployment rate 4.4%
  • Labor force participation rate 62.7%
  • Average hourly earnings up 3.1%

Job losses were concentrated in the service sector, with leisure and hospitality losing 459k jobs. Health care lost 61k jobs (mainly support people) and construction was down as well. FWIW, the 710k number is probably not representative of what is really going on – it will be the cumulative weekly initial jobless claims, which are at something like 10 million.

 

The government is supposed to launch its SBA loan program next week. Apparently many banks will be sitting out. The biggest concern will be reps and warrants, especially when it comes to preventing fraud. The banking system remembers well when the Obama Administration used the False Claims Act to extract massive penalties with FHA lending. Many of those banks, like JPM, never returned to the sector. Also, the requirements to prevent terrorist financing and money laundering, which under the best circumstances takes weeks to do. Finally, the rate the banks will be forced to charge will be too low and will cost them money. But there will have to be reps and warrants relief to get banks to participate. They remember what happened in 2009 and 2010 too well.

 

All of the Fed’s buying has driven its balance sheet up to 5.86 trillion in assets. Before 2008, it was about $800 billion.

 

While most of us are focused on what COVID-19 is doing to the residential market, the commercial market is even worse. The CMBS market is completely frozen. Multifamily, retail, office tenants etc are simply not paying rent right now, and that is going to cascade onto the balance sheets of the banks.

 

There had been talk of a Fed facility to allow servicers to borrow to make advances to bondholders. It looks like that isn’t going to happen, at least not yet. Treasury wants to get a read on how many borrowers actually take advantage of the program. The problem is that if you tell someone that they can skip the next few payments on their mortgage, with no hit to their credit rating, no penalties, and the missed payments will just get tacked on to the end of the mortgage, who isn’t going to take advantage of it? A dollar today is worth more than a dollar tomorrow.

 

Moody’s has downgraded the non-bank mortgage sector from “stable” to “negative” as the financial markets seize up. We have seen the big non-agency mortgage REITs like New Rez, Two Harbors, and Redwood make distressed asset sales in order to meet margin calls.

Morning Report: Surprisingly low payroll gain in September

Vital Statistics:

 

Last Change
S&P futures 2908.5 0
Eurostoxx index 377.44 -2.24
Oil (WTI) 74.56 0.25
10 year government bond yield 3.23%
30 year fixed rate mortgage 4.93%

 

Stocks are flat after the jobs report. Bonds and MBS are down

 

Jobs report data dump:

  • Payrolls up 134,000 (way below expectations)
  • Unemployment rate 3.7%
  • Labor force participation rate 62.7%
  • Average hourly earnings up 0.3% MOM / 2.8% YOY

Definitely a bond-bullish jobs report, with payrolls and average hourly earnings below expectations. The global sell-off in bonds continues, which appears to be dominating. Yet another jobs report where ADP and the BLS get completely different readings. The unemployment rate is the lowest since 1969.

 

While the business press is focusing on the unemployment rate, which is hitting the lowest since the late 60s,  the labor force participation rate seems to be stuck at just under 63%. That ratio (and the employment-population ratio) should be moving higher. Yes demographics (the retiring baby boom) explain some of it, but as people live longer, people should be working longer as well. It probably should go higher, but in the meantime highly paid baby boomers are being replaced by lower earning Millennials, which helps explain why average hourly earnings are moving up at an unsatisfying pace.

 

labor force participation rate

 

Beware of narrative changes. Good news is now bad news. Good economic news now is a negative for stocks because it means rates are going higher. FWIW, higher rates will be negative for some sectors and benign for others. But yes, REITs and utilities which were prized for their dividend yields during the ZIRP years are now going to be under pressure. The homebuilders will be sensitive to this as well, however they shouldn’t be. There is enough pent-up demand for housing that they should be able to pump out volume for years to come. As long as rate are rising for the right reasons (stronger growth encourages investors to take more risk) and not the wrong reasons (inflation on the horizon) then it should be a non-event for stocks. That said, money market instruments, which were eschewed by investors during the ZIRP years, are going to re-take their share of the investment dollar.