Stocks and Mortgage Bonds are both lower after a hotter than expected Employment Cost Index report was released this morning.
Employment Cost Index
The Employment Cost Index is a quarterly report that measures the change in hourly labor costs for employers in the US. Today’s reading for Q1 showed costs rise from 0.9% to 1.2%, which was well above the 1% estimate. Wages remained the same, but benefits rose from 0.7% to 1.1% and accounted for all of the rise. Bonds sold off after this news.
Conference Board’s Consumer Confidence
Helping reduce some of the losses was a very weak Consumer Confidence report, which came in at 97, the lowest level since July 2022. The previous month was also revised lower from 104.7 to 103.1.
The main reason for the miss in confidence was the softer answers to the labor market questions. Those that said jobs were Plentiful fell by 1.5 points and those that said jobs are hard to get rose by 2.7 points, both the weakest readings since November. There was also a 2.6 point drop to those expecting more jobs in the next six months, which is the worst figure since October 2011…including Covid. Income expectations also fell by 1.9 points. Bottom line – the survey data of consumers and businesses do not match up with what we are seeing in the labor market data points we get every month.
Quarterly Treasury Refunding
We reported yesterday that the Treasury needs to borrow $41B more than expected over the next quarter, and we will find out what maturity those Treasuries will be tomorrow morning. The more concentration on the lower end the better for Mortgage rates – Yellen will likely try to keep most on the low end because she doesn’t want long term rates to rise and it’s also expected that rates are going to eventually fall, so why lock in higher rates for a long period of them when you can use shorter term debt today and exchange it for lower rates in the future.
Back to why the Treasury needs to borrow $41B more than expected – The reason is lower tax receipts…but why would we not be getting enough tax receipts if the unemployment rate is so low and the economy is so strong? It brings into question the accuracy of the unemployment rate at 3.8%.
Yesterday we reported that the Quarterly QCEW Data, which is from the Census and is what actually happened – Not using imputed data and looks at almost 12M entities instead of 700k in the BLS, tells a completely different story. While the most recent census data is for Q3, it’s showing 192,000 job losses vs the BLS showing 521,000 job gains…something doesn’t add up there. It also makes you wonder if the unemployment rate is really much higher and if it were reported that way, what impact it would have on the Fed’s decisions.
Apartment List National Rent Report
The Apartment List National Rent Report for April showed that new rents rose 0.5%, and while it increased, it was a deceleration from March, which was at 0.6%. Normally during this time of year rental prices will accelerate till about May or June, then reverse lower. This is not a trend yet, but could point to lower rental figures ahead. Year over year, new rents are still down 0.8%.
Something that may keep rental increases lower is the higher national vacancy rate at 6.7%, which should continue to rise as all of the multifamily new construction comes to market.
We hope at some point the inflation reports we receive captures the lower rental costs.
Case Shiller Home Price Index
Home price gains continue – The Case Shiller Home Price Index, which is the “gold standard” for appreciation, showed that home prices rose 0.4% in February, following a 0.3% in January. Prices are now up 6.4% year over year, rising from 6% in the previous report. This was an extremely strong report, showing that buying a home still proves to be one of the best investments.
FHFA House Price Index
The FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Different than Case Shiller, it does not include cash buyers or jumbo loans. The FHFA reported that home prices rose 1.2% in February and are up a very strong 7% year over year, up from 6.4% in the previous report.
Technical Analysis
Mortgage Bonds continue to trade in a very wide range between support at 98.867 and overhead resistance at 99.647. Bonds are susceptible to big price swings in this range, as we have been seeing, but there is room for improvement if we get some good news out of the Fed tomorrow. We will see if “fairly soon” means tomorrow’s meeting and if the Fed slows down their balance sheet reduction, it could be helpful for Bonds. The 10-year is also trading in a very wide range and will react to the maturity announcement and Fed meeting tomorrow.
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