- The October Employment Report is out and it beat the headline expectation, along with a notable decline in the unemployment rate. For the month, 638 thousand jobs were created versus the 580 thousand median estimate. Private sector gains were even larger at 906 thousand as government jobs fell by 268 thousand as census workers completed their assignments. Even with the solid gain in jobs the scope of the damage still to be repaired is daunting. 12 million jobs have been created in the last six months versus 22.2 million jobs lost in March and April. If job gains can hang around 600 thousand per month, it still means more nearly two years restoring the lost jobs of March and April, and frankly many of those jobs may never return. Meanwhile, the unemployment rate fell a full point from 7.9% to 6.9%, easily beating the pre-release 7.6% expectation. The drop came from a 1.5 million dip in unemployed and an increase of 724 thousand in the labor force. Despite the solid jobs report, with most of the CARES Act relief measures expired and hopes of a new Stimulus 2.0 still very much in doubt, the Fed will remain in full accommodative mode for the foreseeable future.
- The unemployment rate plummeted from 7.9% to 6.9% easily beating the 7.6% expectation. While the drop to 6.9% is certainly positive recall the rate was 3.5% as late as February of this year. Fed Chair Jerome Powell has laid out one of the three criteria to lifting the fed funds rate is a return to full employment. If we use that 3.5% rate as a marker for full employment we’re still 3.4% away. And with job growth slowing to around 600 thousand per month recouping the 10 million jobs lost in March and April will be a multi-year process. Thus, the Fed’s September forecast of rates unchanged through 2023 seems entirely reasonable, if not longer, at this point. The Household Survey—which is used to generate the various employment ratios— found unemployed persons fell by 1.5 million while the labor force increased by 724,000 so both factors contributed to the 1.0% drop in the unemployment rate. That increase in the labor force also caused the Labor Force Participation Rate to increase three-tenths to 61.7%, recouping the three-tenths drop in September.
- For the month, 638 thousand jobs were added to payrolls (all private sector as government saw a decline of 268 thousand jobs as census workers concluded their assignments). Thus, private sector jobs gained 906 thousand for the month versus ADP’s estimate of 365 thousand, quite the disparity. The headline gain beat the 580 thousand expectation, but job gains have been sliding gently lower for months now with 10 million still unemployed after the shedding of 22 million jobs in March and April. Once again the leisure/hospitality field had the largest gains at 271 thousand. The services sector as a whole added 783 thousand jobs. Goods-producing jobs had a decent month too adding 123 thousand jobs versus 97 thousand in September. Construction added 84 thousand jobs picking up the slack from manufacturing which added 38 thousand for the month but off from the 60 thousand jobs gained in September.
- The underemployment rate (unemployed plus part-time workers wanting a full-time job and those wanting a job but not currently looking) fell from 12.8% to 12.1%. In addition to the drop in unemployed, the rate was helped by a decline of 383 thousand decline in part-time workers but partially offset by an increase of 34 thousand for those wanting a job but not currently looking. As we’ve mentioned before, the Fed will want to see this rate back in the mid to high single-digits before declaring victory.
Initial Jobless Claims Plateauing Around 700,000-800,000
While initial jobless claims first fell below a 1.0 million two month’s ago since then the reductions in claims are coming more grudgingly and could stall around the current level when you read about high profile job cuts at Fortune 500 companies like Disney, Allstate, United Airlines, and Goldman Sachs. So, while jobless claims were heading lower by chunks in early summer, the latest month has the figure churning around the mid-700 thousand level as companies align payrolls to their pandemic-adjusted business models.
Mortgage Rates Continue to Decline
If your thought the uptick in Treasury rates during October would do the same to mortgage rates, and perhaps provide a temporary reprieve from prepayments, you are mistaken. Instead, mortgage rates have continued lower, most recently to 2.81% on a 30-year loan (blue line), and that is leading to another uptick in refinance applications as noted by the white line. Thus, prepay activity will continue hot and heavy. In the week ending October 30, refi applications increased 6.4% after rising 2.5% the prior week. So, continue to analyze your MBS portfolios for those bonds that are exhibiting or likely to exhibit increasing prepays and look to perhaps swap out to a newer and/or specified pool that will have a tamer prepay profile.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.09%||Unch||1 Mo LIBOR||0.14%||-0.01%||FF Target Rate||0.00%-0.25%||3 Year||0.279%|
|6 Month||0.09%||-0.01%||3 Mo LIBOR||0.23%||Unch||Prime Rate||3.25%||5 Year||0.422%|
|2 Year||0.15%||Unch||6 Mo LIBOR||0.24%||Unch||IOER||0.10%||10 Year||0.836%|
|10 Year||0.81%||-0.07%||12 Mo LIBOR||0.33%||Unch||SOFR||0.11%|