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 14th - 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.
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