Good Friday AM,

The non-farm payroll numbers came in higher than expected. This is not good for bonds, especially in this environment. The Fed needs every reason he can muster to stay hawkish and a good jobs report gives him the belief that the employment market can withstand more and faster increases. After today’s data, it is likely we will continue a climb up and a retest of 3% on the ten-year bond. I am hoping that Mortgage bonds can hold their current levels. At the moment, it looks like it may.

Here is a deeper dive across the mortgage landscape. I am normally a  glass half full guy but this first piece below is a bit alarming.

In March, MBA released its inaugural, monthly Purchase Applications Payment Index (PAPI) – an affordability index that measures how new fixed-rate 30-year purchase mortgage payments vary across time relative to income. The third PAPI release on May 26 – based on April MBA Weekly Applications Survey (WAS) data – gives us a picture of how affordability has been affected by increasing interest rates and elevated loan application amounts in the first third of 2022.

The national PAPI (based on median mortgage payment and median income) increased from 123.4 in December 2021 to 162.7 in April – an increase of almost 32% (even after we take increasing earnings into account). Indeed, the national median mortgage payment applied for by applicants was $1,889 in April, up from $1,736 in March, $1,653 in February, $1,526 in January, and $1,383 in December 2021. In other words, estimated median payments increased by 37% from December to April.

In this week’s MBA Chart of the Week, we use state level WAS data and show how the PAPI has evolved over the last five months in each state.

The top five states with the highest PAPI in April (shown in green) were Idaho (260.2), Nevada (250.7), Arizona (222.3), California (214.7), and Utah (207.1). Both Idaho and Nevada PAPI values increased by over 35% in the first four months of 2022, while Utah’s increased by almost 38%. Indeed, every state’s PAPI increased in the first four months of the year (although DC’s by less than 1% as median application loan amounts were $84,500 lower in April than December, reflecting the distinctive nature of the DC market). That is, the sharp increases in interest rates for 30-year fixed-rate mortgage applications (by almost 2 percentage points) together with larger median loan application amounts (of 8.5%) have translated (among other factors) into lower affordability in all states in the first four months of 2022.

Here is some more on inflation, the jobs report and what the Fed expectations are (according to the WSJ). The data is very important going forward. Unless inflation drops quickly, the whispers of the Fed raising rates beyond he summer may become a reality. That could push the 10yr up another 50bps and take rates higher (although I still do not expect this to be the case).

U.S. payrolls grew by 390,000 and the jobless rate held steady at 3.6% in May.

Not Too Hot. Not Too Cold. Probably Not Just Right.

If we’ve learned anything about the economy over the last couple of years it’s that past performance does not guarantee future results. That said, the labor market looks like it’s settled into somewhat of a sweet spot, at least for the moment, with more people joining the workforce, slowing but still solid job growth and signs that strong wage gains are starting to ease. Nonfarm payrolls in May rose by 390,000 and for the first time they are less than one million away from their pre-pandemic peak. The unemployment rate held at 3.6% for the third straight month as both household employment and the labor force grew. The consensus among economists is that the pace of job gains will slow—the current levels probably aren’t sustainable and the Federal Reserve is trying to soften the labor market to help check inflation. But for now there’s no sign that’s leading toward a recession, or even a severe slowdown.

For the Fed, Nothing Has Changed

The strong employment figures released Friday keep the Federal Reserve firmly on track to raise interest rates by a half-percentage point at its meeting in two weeks and again in late July to cool high inflation. With Fed officials largely united on the need for half-point increases at both meetings, the debate has shifted to what should occur at the following meeting in September. The jobs report is unlikely to influence that debate significantly because Fed officials have said they are more focused on monthly inflation readings right now and because there will be three more monthly employment reports to digest before the September meeting. To ease concerns about high inflation, Fed officials would like to see the pace of job growth slow, labor-force growth pick up and wage growth moderate.

By the Numbers

The share of the population that is working or looking for work ticked higher in May as more people were drawn into the labor force. Among those in their prime working years, when school and retirement generally aren’t big factors, the participation rate reached a fresh pandemic high.

Overall employment last month was down 0.5% from its prepandemic level in February 2020. But some sectors still have a long way to go. Leisure and hospitality was nearly 8% below its peak. In educational services, local schools were still missing almost 4% of their staff.

Please remain safe and healthy.