Morning Report: Job growth declines, while pay remains strong.

Vital Statistics:

S&P futures4,079-10.75
Oil (WTI)78.24 0.37
10 year government bond yield 3.47%
30 year fixed rate mortgage 6.16%

Stocks are lower as we await the Fed decision at 2:00 pm. Bonds and MBS are up.

The Fed decision is scheduled for 2:00 pm and there will be a press conference afterward. The expectation is for 25 basis points, and the markets will be looking for language in the press release indicating that the Fed is wrapping up its tightening cycle.

The economy added 106,000 jobs in January, according to the ADP Employment Survey. This was lower than the consensus estimate of 158,000 and the 185,000 forecast for Friday’s jobs report. It sounds like there was some sort of weather-related impact which depressed the number.

Leisure and hospitality accounted for 95,000 of the job gains, followed by finance and manufacturing. Trade / Transportation / Utilities and construction saw declines in employment. I suspect a lot of the jobs losses in trade / transportation / utilities were related as they over-committed to space and employment during the pandemic.

Pay growth was 7.3% for job stayers and 15.4% for job changers. Leisure and hospitality saw increases of 10% and was the outlier compared to all the other sectors which were bunched between 6.6% and 7.9%. This is something that will bother the Fed, as “services ex-housing” is their target for inflation reduction. The youngest cohort (ages 16-24) saw the biggest increase as well.

Mortgage applications fell 9% last week as purchases fell 10% and refis fell 7%. “Mortgage rates declined for the fourth straight week and have now fallen almost 40 basis points over the past month. Treasury yields were higher on average last week, while mortgage rates decreased, which was a sign of a narrowing spread between the two,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The spread between mortgage rates and the 10-year Treasury has been abnormally wide since early 2022. Further narrowing of that spread is expected to put downward pressure on mortgage rates in the coming months. Overall application activity declined last week despite lower rates, which is an indication of the still volatile time of the year for housing activity. Purchase activity is expected to pick up as the spring homebuying season gets underway, bolstered by lower rates and moderating home-price growth. Both trends will help some buyers regain purchasing power.”

Joel Kan’s point about the difference between mortgage rates and Treasury rates is important. This gets into the whole esoteric discussion of MBS spreads, which can get complicated quickly. We did get some info on MBS spreads yesterday courtesy of AGNC Investment, a mortgage REIT which announced its fourth quarter results.

Mortgage REITs invest in mortgage backed securities, and they are often the buyer of the Fannie / Freddie securitizations. Think of them as the ultimate “lender” for your production. For the past year, the mortgage REITs have been reporting declines in book value per share as MBS spreads have widened – in other words MBS have fallen in value with interest rates, and the hedges mortgage REITs use have not increased in value enough to make up for the losses. This looks like it finally reversed in the fourth quarter. You can see it in the highlighted row below.

This spread increased significantly in 2022, which has exacerbated the increase in mortgage rates from 3.27% to 6.66%. Note I did a deep dive on MBS spreads in a Substack piece recently.

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