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Market Matters. This Week in Review

By Oscar Busch

Mortgage and Lending with Brand Lending Company NMLS# 1326698

October 07, 2017 04:48 PM

Construction Spending rose a solid .5% in August as spending on residential units rose .2%, following a .4% rise in July. Multi-family spending rose .9% following a 1.9% decline in July. Overall, construction spending only shows a 2.5% year-on-year rise despite a favorable 11.6% jump (year-on-year) with residential construction. At the same time, housing starts and permits have been uneven and point to the risk of slowing in the months ahead.

The PMI Manufacturing Report was released up .3 to a print of 53.1. Although manufacturing growth appears to be moderate, we expect to see a pickup in the last quarter of the year as goods are needed to rebuild southern Texas and Florida.

The ISM Non-Manufacturing Index jumped 4.5 points to 59.8. This is the best showing in more than 3 years, fueled by strength in orders and employment. New Orders rose more than 5 points, backlog orders were up 2.5 points, and deliveries, despite the hurricanes rose 7.5 points.

The ADP Employment Estimate came out at 135K, slightly above estimates of 117K.

The MBA released mortgage originations for the week ending 9/29 as the composite index fell .4% with purchase volume up 1.0% and refis down 2.0%.

The PMI Services Index dipped slightly to 55.3. Production held steady with new orders due to domestic demand up near a 3-year high. Not much hurricane effect here, at least not yet.

Factory Orders saw some increased strength in capital goods orders which helped the index post a plus 1.2% for August. Hurricane Harvey’s late month impact was not able to be quantified by the Commerce Department. Its effects appear to however be marginal. Chain Store Sales, a monthly check up on department, discount, apparel, and drug store chains is reporting improved sales despite the hurricanes.

Weekly Jobless Claims fell 12K to 260K as claims in Texas, Florida, and Georgia (hurricane related) are all coming down.

Non-farm payrolls for September came in at a -33k vs the market consensus of +80-100k. The BLS noted that a 105k drop in food services reflects the two storms and it is believed that since the surveys for this report were taken right when storms hit, the data is severely skewed. As the headline number was weak, the household survey saw a nice improvement and is what ultimately put more pressure on interest rates. The unemployment rate came in at 4.2%, while average hourly earnings post a .5% increase, pushing the year-over-year rate to 2.9%. The BLS did note that the “change in earnings reflects both ongoing labor market trends and possible effects of the hurricanes.” They also noted that “it is not possible to quantify precisely the net effect on employment in each industry” and it is clear that the market is willing to look past the one-off impact of the storms.

As we noted earlier in the week, the bond market looks very fatigued, especially now after the sell-off following Friday’s jobs report. For the past 6 months or so, we’ve been in a 2.0% to 2.40% with little signs of breaking either side of that range. Although we still think the 10yr is in a “wait and see” pattern given the larger headlines at play, the 10yr yield is sitting just below 2.40% now and we need to proceed with added caution. There are still unknowns, with the most important one being that of North Korea. Indications still suggest Trump and the administration are very serious about still eliminating “rocket man” and has instructed the Secretary of State to “not waste his time” with those efforts. To a lesser degree, we see a potential market mover in the President’s decision with his choice for the next Fed Chief, replacing Janet Yellen. The front runner is thought to be former Fed Governor Warsh followed by current Fed Governor Jay Powell. The dark horse candidates are Yellen, Taylor, and Kashkari. Either way, these two cross currents are bound to add volatility to the markets at some point and until larger headlines play out, we expect the 10yr to stay range bound, most likely on the higher side with interest rates remaining vulnerable to higher levels. For now, we still suggest defense, especially as we trade the top of the range. Get your loans locked in and move on down the road.