Why You Might Want To Float Your Rate Into Tomorrow’s Jobs Report

Numbered Floats of the Lobster Fishermen of Conch Key During the Off-Season, Thousands of These Are Newly Painted and Stored All over the Little Island.photo © 1975 The U.S. National Archives | more info (via: Wylio) Mortgage Rates for Bay Area Real Estate and beyond were given a little jolt yesterday based on another signal that our economy is mildly improving… or at least “less bad” than before.

The report that gave rates a kick was the ADP Payroll data for December. ~300k new were created in December, whereas the expectation was for 100k. That’s a huge upside surprise, and markets react swiftly to surprises.

But the ADP report is taken with a grain of salt, in this case specifically because it doesn’t categorize temporary employees differently than full time ones. So, the numbers are assumed to be full of seasonal workers as you might expect when you realize that most retailers hire on extra help through the Christmas season.

Why You Want To Float

Tomorrow morning, before most of us are even awake, is the REAL jobs report, which contains official economic data on December jobs, and the unemployment rate. The market is highly sensitive to unemployment right now, and looking hard for anything to confirm or deny that we have an improving economy. 300k new jobs would be a significant step better than what we’ve been seeing in recent months, years even.

But if the report tomorrow helps shine a light on the ADP report, indicating that it was full of temporary (non-permanent) employees, then the market will likely want to exhale and undo the move it made yesterday, which should bump rates back down a little.

I’d be careful though, the larger trend in recent weeks has been for higher rates, driven by “less bad” economic data. So the sensitivity here is definitely to the upward direction with rates, even though I believe the probability favors a downward move.

With the volatility we’ve seen in recent months, be prepared for a report like this to move the market by .25% or so in either direction, if it misses expectations by a wide enough margin.

Want to talk about it? Send me an email and let me know what’s on your mind…

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    Economists Give Each Other Wet Blankets For Christmas

    Don't be this guy

    Even though I’m no economist, my brain is definitely wired that way. But sometimes the drab, dry, robotic formula-crunching path to every decision about every choice you have to make is a real buzzkill.

    Take the Christmas holiday, and the associated tradition of gift giving for example. This week, three like-minded stories came into view, all very interesting, and each picking apart the economics of gift-giving to the extent that a sympathetic ear would be ready to just give up and quit.

    Bah. Humbug!

    Here’s a link to and description of each piece  from the “boo-hiss” crowd:

    1. Ric Edelman – Teaches you how to keep your Christmas shopping budget under control. I love Ric, and it’s his job to teach consumers to be smarter about their money. I get it.  But people need to have a little fun too. While he’s charismatic for a money & numbers guy, he’s admittedly not where you go to get advice on fun ways to burn through cash. Fine. But … brrr you wouldn’t have a more frigid Christmas if you ran out of firewood last week.
    2. WePay infographic on Mashable.com I don’t know WePay. I gather they’re an outfit that aims to teach you how to be smart with your money. Cool, fine. I really like this view of the gift “Missgivings” – they really do hit on several aspects of the holiday gift frenzy that generally get people to that Scroogy disposition. Very economic. Looking at opportunity costs, and beyond. There’s a lot of waste – your time, your money, the crowds at the stores, and the odds that you find a gift for somebody who would pay the same amount for that item – slim to none, right? Fine. But BORING!
    3. Joel Waldfogel & the Planet Money team on NPR – devise a very clever experiment to address the situation the WePay infographic illustrates so well. It’s actually quite amazing what happens. You should listen. Waldfogel is author of Scroogenomics: Why You Shouldn’t Buy Presents For The Holidays. I have not read it, but it does sound pretty interesting (it’s that econ brain wiring, sorry). Bottom line, go ahead it if you’re looking to make excuses for not giving loved ones gifts. Booo!

    The problem is, as much as I get the logic, I hate it. Gift giving is a sport I enjoy, and as much as I love to receive gifts (email me for my address, ha!) I truly prefer to give them (In this regard, I fancy myself a lot more Jack Donaghy than Liz Lemon). But only when there’s a good reason, and a good gift to match the person. Not a forced, have-to-dont-really-wanna-but-its-a-holiday thing. That’s weak.

    My recipe for success with gift-giving:

    1. Do your Christmas shopping all year. Keep mindful of people you care about, and you’ll stumble into great things that will be fun to give as gifts. Or, the reverse: Stumble into something you think is cool, and think about who would appreciate it the most.
    2. Buy it, or bookmark it. A true economist would never pay early for something they didn’t need until later (see time value of money). And a true miser would scour the internet for every possible discount or free shipping code (takes one to know one).  Whatever floats your boat. But this way you’re not left scratching your head, elevating your heart rate, or worse – not giving gifts to people on Christmas.
    3. That whole crowded mall in mid-December thing takes on a whole different appeal if you can go and just walk around with a big wool jacket and a hot peppermint mocha. No shopping, just soaking it in, watching people ice skate, listening to the Vince Guaraldi tunes leaking out from the department stores, or playing in the square, whatever whatever. This is how you consume the season. Trust me.

    This way, you don’t waste, you don’t give crappy gifts, and you don’t freak out at the malls and ruin the spirit of the season. Plus, if you actually pay for gifts a little here and a little there, you’re not going to have a credit card hangover in January…

    … wishing you a merry Christmas

    Slideshow of 100 Abandoned Homes in Detroit

    This is a view of disaster through an artistic lens. There are some downright gorgeous shots in here, every one of them representing a story of tragedy, loss, failure, and hurt. A sign of the times, Detroit has had as many headlines as any other city as a representation of the worst economic conditions in our nation in ‘The Great Recession’.

    Remember the mood only 6 months ago? While I think the recovery rally cries are a bit premature, it certainly does not feel as likely as it once did that we could see a full wide-scale meltdown or economic collapse.

    We’ll come back, and the beginning of that long process is underway. I’d love to see these same 100 photos updated in a few years.

    Weekly Mortgage Interest Rate Survey on Mortgage-x

    I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

    Vote: () () Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

    Comment by John C. Glynn: A second-guessing of the ‘recovery’ will put pressure downward on rates, but be careful about the implications of an unwinding Federal Reserve with their asset purchase programs designed to lower rates – they are coming to an end.

    Find out what others are saying by clicking here. (hint, looks like I am running with the pack this week…).

    Unemployed to US Economy: "Go on without me…"

    I am concerned about the recent optimism in the financial markets. Sorry. Not cool to be a pessimist. But I am not – just trying to be a realistic optimist here.

    We lost 245k jobs in the month of July. This made markets happy because it was less than expected (325k), and fewer than the prior month. Around January of this year, we were losing ~750k per month. So yeah, improving, but not exactly good.

    Is this cause for optimism? How can we distinguish between optimism and an evaporation of pessimism? Are they the same thing?

    What bothers me are the following details, below the headlines of the news release:

    • the only growth in new jobs is among the 55 and up crowd – baby boomers who, under other circumstances, would no longer be in the job market.
    • nearly 5MM people have been out of work for more than HALF OF A YEAR

    The second point leads me to wonder, when does fatigue set in? The unemployment rate went down this period (9.4%) but this is expected to be anomalous in retrospect; unemployment is expected to break 10% within the year. Since the survey methodology only considers “unemployed” people to be those A) without work and B) actively looking for work, how many people have given up? How many are tired of sending resumes out multiple times a week, getting no replies, and simply focusing on other things until there are signs that jobs are available?

    I love this analogy from Planet Money: The foot is on the pedal, and it’s floored (Federal Funds rate @ 0% and other stimulus). The car (our economy) is rolling backward. But the speed at which we are rolling is slowing. And that’s enough to get us where we’re going? hmm…

    I am not yet convinced. What say you?

    Weekly Mortgage Rate Survey on Mortgage-x

    I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

    Vote: (V) (V) Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

    “Comment by John C. Glynn: Discord among analysts – and thus volatility – continues. There’s enough reason to expect rates to remain low, but the sensitivity seems to be to the upside for rates, so bad timing can potentially hurt.”

    Find out what others are saying by clicking here. (hint, all over the map – still – which reinforces my belief about uncertainty above…).

    090706 Less Worse Syndrome and other Brain Dumps

    Are we in the midst of recovery? Has the Great Recession hit bottom? The market chatter has definitely shifted. Key changes include:

    • “green shoots” instead of “next shoe to drop”
    • “inflation” instead of “deflation”
    • “recovery” instead of “bottoming”

    So…..?

    During the last Fed meeting, there were actually conversations that included speculation that the Fed would either raise rates, or begin looking in that direction. They said nothing of the sort. And even though the oddsmakers had the chances of rates changing at that meeting at less than 4%, there was still anticipation along these lines. Since that meeting, SF Fed President (evidently in the running to be the next Fed Chairperson) reiterated her belief that the Federal Funds rate would be at or near the current level of 0.000-0.250% into 2010 or longer. huh.

    Paul McCulley
    says, discussing the eventual hiking of Fed Funds rate:

    “And when is all this going to happen? Last week, the markets started to romance the notion of before the end of 2009. To me, this is simply silly. In the matter of cutting off, and then kikking, the fat tail risk of deflationary Armageddon, boldness in execution is no vice, while patience in declaring victory is indeed a virtue. The Fed has been bold and is committed to patience. Bravo! And the first Fed rate hike? Call it no sooner than 2011.” -6/15/09

    It’s going to be tough to pull out of this with rising unemployment. At 70% of GDP, Consumer Spending is a critical factor in new environment. Consider this from Bridgewater, which I recevied from John Mauldin:

    “… as long as credit remains frozen, spending will require income, and income comes from jobs. And debt service payments are made out of income. Therefore, in a deleveraging environment job growth becomes an important leading, causal indicator of demand and other economic conditions.”

    Less Worse syndrome is dominating the markets right now. For example, in May, the total number of jobs lost came in around 345k, but since April had losses of ~509k, the markets saw this as a positive sign. Job losses are not positive. The month to month changes may indicate a change in the trend, but not just on one report. The June losses were at 465k. So that’s 509, then 345, then 465. During the mnth of June, before the June data was released, the markets were optimistic based on an appearance of “less worse”. They appear to be reconsidering…

    The California new home purchase tax credit – 10,000 to anybody buying new construction residential real estate in CA has expired. The program hit it’s limit at 100,000 applicants.

    There is a 1 page bill in congress to put the hated HVCC (Home Valuation Code of Conduct) policy on hiatus for 18 months. If you are engaged in a financing transaction, you’ve either encountered this acronym, or are about to. It is causing all kinds of problems, and creating quite a stir. Should be interesting to see where this goes. I’m not too encouraged by the 1-pager, but there’s been overwhelming support from the industry…

    Fed Watch: What Did Today’s Policy Statement Really Say?

    “Strikes and gutters, ups and downs…”

    I have not seen this much anticipation ahead of a Federal Open Market Committee meeting in I don’t know how long. This component of the Federal Reserve meets for a 2 day session every 6 weeks, and makes a formal policy statement at around 11:15 (pacific) on the 2nd day. Generally, there are a lot of eyes on the markets in this moment, as the Fed’s statement will contain an update to or reassertion of the Federal Funds rate, a key short term rate with implications for the economy and longer term rate outlook. But there are also a few carefully constructed sentences released to justify their rate-setting decision, and the markets try to read between the lines for hints at what the Fed might be thinking.

    When investors buy bonds, the values increase, and rates get lower.

    We entered this week’s meeting in a state of uncertainty. During the spring months, the bond market had been flat for several months, rates for mortgages remaining relatively calm. Then, a few weeks ago, after a few economic reports indicated a potential recovery beginning to take place in the economy. This caused bond investors to pull some money out of the market in favor of other vehicles – like the stock market. The momentum gained traction until the levee broke, and a lot of the ‘safe haven’ money that goes into bonds during bad economic times started to flood its way out, causing rates on mortgages to rise – and rise quickly.

    Just as quickly, the ‘confidence rally’ came to a halt, and the markets seemed to be reconsidering the idea that we were about to come out of the woods of The Great Recession. And that’s where we were today – caught in the middle, unsure of whether we are going to head into recovery, and bump right into hyper-inflation, or another wave of economic pessimism, causing bonds to regain their appeal.

    All eyes were on Ben Bernanke and the Fed’s policy statement. The markets wanted to be reassured that inflation was not an imminent threat. They wanted confirmation that the Fed has an ‘exit strategy’ in place to unwind some if the excess reserves that have been pumped into the economy to fight deflation. Funds which if left unchecked, should lead to inflation again at some point. But there are as many critics of the inflation treat theory as there are proponents. And this causes the market to be uncertain. They wanted something to chew on today…

    Here is a link to the policy statement. It was all old news. Nothing new. Just a subtle reference to the idea that they expect inflation to remain low, and that they are committed to their campaign to keep participating in market stabilization efforts.

    The bond market made an initial sell-off, but knee-jerk reactions are typical. By the end of the session, the market for Mortgage Bonds (underlying instrument affecting mortgage rates) were dead flat on the day. I’ll give credit to Bernanke for playing it cool, and effectively managing the expectations of the market. By not responding directly to the wishes of the market, he reasserts the impression that he is in control. It may not be what the market was asking for, but the market abides.

    Weekly Mortgage Rate Survey on mortgage-x

    I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

    Vote: () () Over the next 30 days rates will decline significantly; over the next 90 days rates will decline slightly.

    “Recent bond market deterioration represents a shift in sentiment, and the high volatility is representative of a lack of conviction. No markets like uncertainty. The shift toward optimism that we are coming out of the Great Recession may be premature.”

    Find out what others are saying by clicking here. (hint, all over the map, which reinforces my believe about uncertainty above…).

    Long Exhale… Brain Dump 06/09/2009

    I’ve been plugging away some long hours over the last few months, but I’m back to shake some dust of the blog here. No cohesion promised here, just a spewing of some of the more evocative and interesting ideas, quotes, etc that I’ve seen since the last post:

    – Jon La Grou introduces an awesome home construction enhancement, cheap, smart, simple. Updating 150 year old technology, bravo. 5 min video

    John Mauldin on the current crisis: “..This again illustrates the problem of using past performance to protect future results. You have to look at the underlying conditions in order to get a real comparison, and we have not seen a deleveraging recession in the US for 80 years. Using the past data in today’s world is useful, and may be harmful to your portfolio.” >> Word.

    Pimco’s Paul McCulley on the current crisis: “There’s nothing like a bull market to make geniuses out of levered dunces.”

    – There’s a battle Royale taking place right now in the debate on the future of interest rates. We saw the low trend break down over the last two weeks, and what followed was one of the biggest downlegs in the bond market I’ve ever seen. Cheerleaders of the recovery think that long term interest rates need to be higher to attract investment capital. The Federal Reserve can’t continue to make the market with mortgages at 4.5% if all of the ‘safe haven’ dollars are now getting cozy with alternative vehicles to the US Treasury markets. But are we even out of the woods yet? With credit contracting, and unemployment rising (10% here we come!) how are we supposed to spend our way back to positive GDP growth? It doesn’t add up… I said it before, and I’ll say it again, we’ve got a lot of bites left in this sandwich…

    – US Housing affordability index (which began tracking data in 1971) was at an ALL TIME HIGH before rates popped. This has been bringing in bargain hunters to gobble up the excess housing inventory. But the momentum was just getting going. With rates up, it knocks the index back a ways. But financing a home today is still cheap by historical standards. 30 year average of the 30 year fixed mortgage rate is closer to 7.500%

    – In much of the recent economic press, there is discourse along the lines of “the worst is behind us”. The stock market has had one or two down weeks over the last three months. In other circles, we hear “commercial real estate is the next shoe to drop”. Given that it would be less likely that the government would bailout strip mall developers, will the markets be able to shake off an era of see-through buildings and continue dancing like there’s nothing to worry about?