Mortgage Rates Unchanged Following Jobs Report

The first week of every month has always put a tightness in my stomach as it can be (and has been) a very volatile situation when it comes to the Jobs report.  Even though there are preliminary numbers that come out from ADP on Wednesday, they sometimes have been so off that it only provides more anticipation and speculation on when the report is given out at 7:30AM that Friday of the week.  Today, we saw unemployment declined to 4.1% from 4.3% in September (estimates were 4.2%). Non-farm jobs were a lot less than expected, 261K against 325K expected, but September jobs, originally -33K were revised to +18K (+51K). Private jobs +252K against estimates of 320K, but September revised from -40K to +15K (+55K). Manufacturing jobs +24K against forecasts of 19K and September revised to +6K from -1K. The labor participation rate 62.7% from 63.1% in September. Here though, is the important data point - average hourly earnings, expected +0.2% after increasing 0.5% in September. As reported, earnings were 0.0% and yr./yr. average hourly earnings +2.4% against 2.7% expected, and down from 2.9% in September.

The monthly employment data, as we always remind, is a walk on the wild side in terms of what is reported and what was expected. The initial reaction to the mixed data kept the 10yr note yield unchanged from yesterday’s close and MBS prices unchanged from yesterday. Stock index futures were better.

Of all the details, it is the lack of increases in earnings that grabs my attention. No inflation in wages, even with unemployment at full employment and growing optimism that the economy will grow with the tax cut package released yesterday. Markets and pundits were excited about the tax cuts laid out by Republican leaders, but it isn't going to be simple, quick or a done deal as was outlined. The idea that Congress will get a bill passed by Thanksgiving as President Trump wants is unlikely.  The real question now is, will a tax bill pass this year? And in what form? There are many Republicans from high state tax states that are not going to go along with the part that eliminates federal deductions for those taxes. The tax bill proposal is the beginning, not the end of it.

Trump off to Asia today, visiting Japan, South Korea, China, Vietnam and the Philippines. He will not return to the US until November 14^th - the longest trip to Asia by an American president in more than a quarter century. Two U.S. strategic bombers conducted drills over South Korea, the U.S. Air Force said, raising tensions with North Korea just days before Trump visits the region, seeking to shut down Pyongyang’s nuclear program.

Two other data points, October ISM services sector index beat expectations, and according to my favorite Italian reporter on Squawk Box,  Rick Santelli, it is only the 4th time in the 20 years of this index that the index is over 60. Also, September factory orders, beat expectations as well.

The tax plan preserves the home mortgage interest deduction for existing mortgages and maintains the home mortgage interest deduction for newly purchased homes up to $500,000 – providing tax relief to current and aspiring homeowners. Most of the country can live with that but on both coasts, where property values are very high, that may present a problem. Look for lobbyists for NAR and NAHB to resist that provision. There are many key debatable concerns about the plan that will take weeks to resolve. The Republicans not likely to stay together and override Democrats’ objections. They didn’t do it on healthcare, and given the divide within the party, this will not be easy. How much direct focus will be aimed at the increases in the US debt will be interesting. Politicians have a distinct pattern of kicking the increasing US debt down the road.

The bond and mortgage markets continue to hold some gains this morning. The bellwether 10yr note this morning declined to 2.32% (its next support level) - but at 11:00AM is back up to 2.35% - trading below its 20-day average, now working on its 40-day average at 2.32%. No inflation fears, good for the bond market, but overall better economic outlooks still a drag on rates. The Powell nomination for the Fed Chair is a continuation of the slow Yellen approach to increasing rates, although markets and most economists do expect the Fed to move rates up 0.25% when the FOMC meets in December. The stock market continues to lead interest rates, still the same thing. Unless stocks finally capitulate, the outlook for fixed income rates will remain more broadly bearish.