How Seriously Shall We Consider Ourselves On The Brink Of Epic Changes?
- A chart of today's action
- Shall we consider ourselves on the brink of potential disaster?
- Some specific discussion on implications of a positive NFP report tomorrow
(if you caught the last post, all ended as expected as highs and lows in both MBS and treasuries continued to occur in lesser magnitudes than earlier in the day. Aka decreasing volatility/narrowing ranges ahead of significant data)
So with the charts relatively boring, if you're interested, here's a quasi-op-ed, quasi-"perspective amidst the chaos" from me to you. If you'd rather skip that, there are some specific NFP considerations and general truisms about the nature of "consensus" vs. actual prints on econ data. enjoy.
How Seriously Shall We Consider Ourselves On The Brink Of Epic Changes?
MBS have sold off heartily this week... Treasuries bounced up to long forgotten levels... Stocks have been "loitering" around the threshold of another leg up in the so-called recovery rally... Fed MBS is done... seasonally bearish bond months are right around the corner... If it's not one piece of stomach churning news, it's another
And tomorrow brings the headliner for this particular sporting event in the form of what's widely held as the most important piece of economic data each month: Non-Farm Payrolls (jobs report, employment situation, etc... but from here on out, I'll use "NFP").
Not only that, but it's expected to be positive--as in showing positive job growth for the first time in a long time. Does that translate into more bullish recovery sentiment destined to take stocks and interest rates higher? Was last Wednesday--a sort of diet Coke version of the original black Wednesday--just a prelude to the impending carnage of a possible large-scale shift in sentiment about the economy?
In a word, no.
NFP can really cause a shift in market levels in the near term, but where's the organic recovery? And to whatever extent the material improvements in the economy justify gains in stocks and concern over Fed policy, do they REALLY justify WHERE WE ARE? I'm not the most vibrant crayon in the box, but I'd say "hardly.." AND I'd do so with a sort of sanctimonious scoffing noise for emphasis!
Sure, there are plenty of reasons for the stock lows from just over a year ago to be correcting, but a not-insignificant portion of those reasons are questionably sustainable by the time QE and other recovery efforts are backed out of the equation. How much organic growth has been created?
Heck! Maybe a lot! And if that's the short term case, rates will go up more than they're probably justified to go up. But there's systemic risk in rates rising before the economy is ready. With the amazing amounts of shadow inventory waiting in the wings, ongoing "realizations" about just how willing 800 FICO >20% DTI folks are to walk away from their 400k house with the 800k mortgage, and the continued shock that the media and even investors seem to have that 2007 conforming SISA isn't performing like 2009 deals, one might make a reasonable case for "ongoing pressure on home prices" if interest rates all of the sudden, went up even moderately.
After all, we've all experienced whatever percentage of clients we've had (for me, at least 80%) whose primary decision is regarding the interest rate and the payment. In that sense, interest rates have a real impact on values. And if values go down, and interest rates go up, it's a fair assumption that the economy cannot recover in any grand fashion. I don't think that we have to see a "housing-led" recovery, but more certainly a "housing-included" recovery.
So take heart on those bigger picture questions of tomorrow being a large scale shift, and the end of all happiness for rates and mortgages, etc... I don't think it's happenin' tomorrow. Could be wrong, but go with your gut.
NFP and Econ Data Specific
As far as tomorrow specifically, I'll paste a comment I wrote earlier today in response to a question about a positive number on tomorrow's NFP being bad for rates.
"There's a broad consideration that applies to all economic data and a specific consideration for tomorrow's NFP.
1. BROAD - economists are polled in order to generate median and/or mean forecasts of where economic data will print. The markets trade based on the expectation of these estimates to a large extent. This is where the term "baked in" comes from. There can always be variance or additional trade considerations based on the internal components of a given report, but in general, if NFP were forecasting +200k jobs created based on the estimate, the markets would do a fairly good job of coming into the report at the approximate levels they'd like to be at if the report is actually +200k. Not a hard and fast direct correlation, but the point is that the EXPECTATION is significantly more important than the headline numbers on data themselves.
So in this broad sense, because tomorrow's consensus is in fact 200k, tomorrow is likely to be a positive print, but if it prints at 200k, it will merely be hitting the expectation on the screws and it's uncertain that this would indeed send rates higher. However, if it was +300k that WOULD likely send rates higher as it would be 50% higher than the expectation.
2. SPECIFIC CONSIDERATION Tomorrow's NFP also includes 150k ethereal jobs from temporary census hiring. Not actual job creation. There is also an expected distortion from the uncommonly horrible winter weather that potentially affected the report last month. That was DIScounted last month, and is REcounted this month. In other words, just like we're expecting an artificial 150k from census hiring, we're also expecting an artificial "something else" from the unwinding of the winter weather effect.
SO! Whatever the actual headline is, say 200k, that will be automatically discounted by 150k + whatever the winter weather effect is thought or determined to have been, and we'll be left with a number much much much closer to previous headlines, and not some monstrosity of job growth positivity, destined to hurl bond prices out the window at 40,000 feet. In fact, I'd say that NFP has to beat estimates by a bit in order to be taken as a net positive. Whereas anything UNDER 200k will very possibly allow bonds to either hold their ground or even rally, especially if stocks are selling."