How Do Labor Costs and Productivity Influence Mortgage Rates?
Good Morning. Jobless Claims and Productivity & Labor Cost data has hit screens.
INITIAL CLAIMS: In the week ending May 1, the advance figure for seasonally adjusted initial claims was 444,000, a decrease of 7,000 from the previous week's revised figure of 451,000.
The advance number of actual initial claims under state programs, unadjusted, totaled 392,629 in the week ending May 1, a decrease of 33,783 from the previous week. There were 536,648 initial claims in the comparable week in 2009.
The largest increases in initial claims for the week ending April 24 were in California (+6,418), Massachusetts (+4,526), Oregon (+3,117), Kentucky (+1,800), and Louisiana (+993), while the largest decreases were in Florida (-2,766), North Carolina (-2,650), New York (-2,601), Wisconsin (-2,522), and Georgia (-2,197).
CONTINUED CLAIMS: The advance number for seasonally adjusted insured unemployment during the week ending April 24 was 4,594,000, a decrease of 59,000 from the preceding week's revised level of 4,653,000. The 4-week moving average was 4,649,000, an increase of 8,000 from the preceding week's revised average of 4,641,000.
The advance unadjusted number for persons claiming UI benefits in state programs totaled 4,635,631, a decrease of 152,657 from the preceding week. A year earlier, the rate was 4.7 percent and the volume was 6,280,863.
The highest insured unemployment rates in the week ending April 17 were in Alaska (6.6 percent), Puerto Rico (6.0), Oregon (5.8), Nevada (5.1), Wisconsin (5.1), California (5.0), Michigan (4.9), Montana (4.9), Pennsylvania (4.9), Idaho (4.7), and North Carolina (4.7).
EMERGENCY UNEMPLOYMENT COMPENSATION (EUC):provides benefits to individuals who have exhausted regular state benefits. The EUC program was created on June 30, 2008, and has been modified several times. Most recently, on April 15, 2010, the President signed the Continuing Extension Act of 2010 which extended the expiration date of the EUC program to June 2, 2010. Individuals establishing benefit entitlement as of this date can collect the remainder of this entitlement through November 6, 2010. LEARN MORE. Emergency benefits rose by 153,786 in the week ending April 17.
EXTENDED BENEFITS (EB): provides benefits for eligible claimants who have exhausted regular UI benefits and all EUC benefits. Extended Benefits fell by 997.
Plain and Simple: both Initial Claims and Continued Claims were close to expectations and once again appear to be leveling out. Nothing new. The 152,789 rise in EB/EUC claims is a reminder of the fact that 6.5 million people have been unemployed for longer than 27 weeks---this is 44.1 percent of the work force. This is shaping up to be a jobless recovery...go back to school or seek out specialized training if you are without a job.
WHY DO I SAY THAT?
High Productivity and Low Unit Labor Costs! Those who have a job don't want to lose it!
Productivity is the output an employee produces for each hour of work. A productive work force is essential if the economy is to grow faster and faster. It is even more important when firms are laying off labor because the remaining workers are relied upon to perform additional tasks. Plus labor costs make up about 70% of business expenses so if a company is not using their labor force effectively they could be wasting a lot of money.
Nonfarm business sector labor productivity increased at a 3.6 percent annual rate during the first quarter of 2010, the U.S. Bureau of Labor Statistics reported today, with output rising 4.4 percent and hours worked rising 0.8 percent.
From the first quarter of 2009 to the first quarter of 2010, output increased 3.1 percent while hours fell 3.0 percent, yielding an increase in productivity of 6.3 percent. This gain in productivity from the same quarter a year ago was the largest since output per hour increased 7.0 percent over the four-quarter period ending in the first quarter of 1962.
BLS defines unit labor costs as the ratio of hourly compensation to labor productivity.
From the release...
Unit labor costs in nonfarm businesses fell 1.6 percent in the first quarter of 2010, as the 3.6 percent increase in productivity outpaced a 1.9 percent gain in hourly compensation. Unit labor costs fell 3.7 percent over the last four quarters, as the 6.3 percent increase in productivity outpaced a 2.3 percent rise in hourly compensation.
Normally, the more productive the work force is, the higher the wage they can receive, this is based on the theory of marginal revenue product. Basically it says if it takes less input resources to produce the same amount or more output (higher productivity = more output), then there should be more revenue left over to pay the employees who are working harder (or more efficiently). This of course assumes buyer demand and price levels are steady
Unfortunately this theory loses some of its relevance when the economy is struggling to distribute wealth to consumers. A kink in the distribution of wealth supply chain has resulted in consumers seeking out the best deal possible. For example, Walmart is doing well because they are able to reduce prices thanks to their ability to buy goods in huge quantities (economies of scale). Because producers have been forced to reduce price to sell additional units of their goods, increases in productivity have not resulted in increases in wage rates. When the Fed says inflation is under control, this is one metric they pay much attention to.
Plain and Simple: Productivity advances have served to limit further layoffs and keep inflation low....this a positive for the housing industry as controlled inflation rates help keep mortgage rates low. Unfortunately low wages are a BAD THING for homebuyer demand as lower wage rates reduce the incentive to seek out employment.
After the release...
Stocks are lower and the benchmark 10 year TSY note is off its overnight yield highs...but still inside the range seen yesterday. The 3.625% coupon bearing 10 yr TSY note is unchanged on the day yielding 3.546%. The 2s/10s curve is 2bps steeper.
Rate sheet influential MBS coupons are unchanged as well. The FN 4.5 is +0-00 at 101-03 yielding 4.377%. The secondary market current coupon is 4.349%. The CC yield is 80.3 basis points over the 10 year TSY note and 78.7 basis points over the 10 yr interest rate swap. Yield spreads opened up tighter but have since leaked back to the wides of the week...and the widest spreads seen since Fall 2009.
The big question: when do servicers start buying "rate sheet influential" MBS? As yield levels fall, servicers are forced to adjust the duration of their assets to match the duration of their liabilities (balance inflows to outflows). They should have by now but haven't...if 10s hold steady between 3.50 and 3.60 we should see some forced buying which will result in snowballing as fast money jumps on for a free ride to tighter spreads. This is our best hope for a reversal of recent spread tightening. The other option is...benchmark TSYs sell off. Rate sheets rebate won't benefit from that...
REPRICES FOR THE BETTER AROUND 101-09
REPRICES FOR THE WORSE AROUND 100-26
WHAT IS MOVING THE BOND MARKET AT THE MOMENT?
Here is some useful information for rebate watchers: Chase Best Effort Pricing was BETTER than Mandatory yesterday. This is an opportunity for floaters out there...looks like Chase is trying to limit their fall out risk.