Morning Report: Payroll growth falls in March

Vital Statistics:

S&P futures4,125-7.75
Oil (WTI)80.49-0.25
10 year government bond yield 3.32%
30 year fixed rate mortgage 6.27%

Stocks are lower this morning on renewed recession fears. Bonds and MBS are up.

Private employers added 145,000 jobs in March, according to the ADP Employment Report. This was lower than the 200,000 expectation, and is well below the 240,000 forecast for Friday’s payroll number. Annual pay increased for job stayers by 6.9%, while people who switched jobs saw a 14.2% increase. “Our March payroll data is one of several signals that the economy is slowing,” said Nela Richardson, chief economist, ADP. “Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down.”

Leisure / hospitality was the biggest gainer, with 98,000 jobs, while we saw declines in finance and professional / business services. Manufacturing also fell. That said, the softening of the labor market looks to be occurring in the white collar sectors, not the blue collar sectors.

Still the pay increases, especially in services ex-housing will be a thorn in the Fed’s side. Look at the pay increases for leisure / hospitality – pushing 10%.

Mortgage applications fell 4.1% last week as purchases fell 4% and refis fell 5%. “Spring has arrived, but the housing market is missing the customary burst in listings and purchase activity that typically mark the season. After four weeks of increasing purchase application activity, volume declined a bit this week even with another small drop in mortgage rates,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Additionally, refinance application volume continues to be quite low. Although the mortgage rate for conforming balance loans declined by five basis points over the week to 6.40 percent, the mortgage rate for jumbo loans increased by nine basis points to 6.36 percent.  While we have seen relative weakness at the high end of the housing market in recent months, the divergence in rates suggests that banks may be tightening credit in response to recent challenges, preserving balance sheet capacity as deposit balances have declined. In recent years, most jumbo loans have been kept on depository balance sheets.”

Conforming versus jumbo rates YTD:

Jamie Dimon put out his annual shareholder letter yesterday, and discussed the banking crisis, which he says is not over.

Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight. Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known – both to regulators and the marketplace. The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep. It is unlikely that any recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise of interest rates placed heightened focus on the potential for rapid deterioration of the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits. Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements. Even worse, the stress testing based on the scenario devised by the Federal Reserve Board (the Fed) never incorporated interest rates at higher levels. This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them.

It is fascinating that the Fed’s stress tests didn’t envision that an environment of rising interest rates could cause trouble given that this was precisely the situation in the 1970s that was the impetus for banking deregulation and the S&L crisis in the 1970s.

As he points out, this is not going to be a replay of 2008 – we are talking about Treasuries and MBS, which are money good. The ultimate recovery on these bonds is par, not something like 50 or 60. Silicon Valley Bank made an interest rate bet and was wrong,or more charitably, early.

Jamie Dimon goes on to talk about the necessity of the regional banks, and it is clear that JP Morgan isn’t interested in taking over a bunch of deposits fleeing the regional and smaller banks.