Good Friday AM,

Jobs report day. That is the focus. The expectation was between 255k and 275k new jobs which is well below last month’s 315k. The print came in at 263k so pretty close to the middle of the range. The headline unemployment rate was 3.5% vs expectations of 3.7%. Hourly earnings were .3 as expected. The report shows softening for sure, but the expectations were low enough that the report is not an outlier, despite being below Fed expectations (see below) and the market reaction was as a result, not positive. Stocks taking bigger losses than bonds, but both are in the red. The 10-yr has pushed back to 3.87% (was 3.53% on Monday) and we will have to see what comes of this selling and whether we push back up to 4.00%.

It is alarming to me that these huge swings are not surprising anymore.

The 10-yr yield should not ever move 35 basis points in a week without markets crumbling.. it happens way too often and now we are becoming numb to it. So, the September employment report will likely keep the Federal Reserve on track to approve another interest-rate increase at its meeting next month as officials seek to lift borrowing costs high enough to soften the labor market and ease inflation pressures further. Next week I will share a chart on CPI and why inflation is going to come down naturally although we won’t see a big decline until November.

The below chart shows where employment is vs where the Fed estimates it will be:

Underscoring the Fed’s case for a rate rise, job gains are still running well above pre-pandemic levels.

I wanted to share the below insight courtesy of the Mortgage Bankers Association.

I do continue to believe that any moderation of home prices is going to be temporary, based on temporarily high interest rates and constrained inventory (the amount of months of supply is elevated as much by a lack of velocity of transactions as it is by additional homes being brought on the market).

At the end of September 2022, the U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau released 2021 American Housing Survey (AHS) summary table estimates in the AHS Table Creator and 2021 AHS National and Metro Public Use File microdata. The AHS, last updated with 2019 data, is the “most comprehensive national housing survey in the United States,” and provides information about the quality and cost of housing, including data on “the physical condition of homes and neighborhoods, the costs of financing and maintaining homes, and the characteristics of people who live in these homes.”

This data highlights the lack of new construction over the last decade. Coupled with the disruptions from the pandemic and strong housing demand from the millennial cohort, the U.S. housing market is structurally low on supply, as evidenced by extremely low vacancy rates of units for rent or for sale. Even though the current spike in mortgage rates has sharply decreased demand, we expect this chronic lack of inventory will be a factor in housing markets for some time.

A friend mentioned to me, thankfully we don’t live in Florida. Litigation is looming for home insurers in Florida as cash-strapped, underinsured homeowners—paired with an aggressive plaintiffs’ bar—are expected to turn to the court system to try to force payments for flood damage that the carriers say they aren’t legally obligated to cover. Fewer than one-third to just over 40% of the Florida homes in the two coastal counties hardest hit by Hurricane Ian are covered by flood policies, although standard homeowners’ policies in the U.S. for decades have excluded flood damage. In some of the inland counties badly flooded by Ian’s torrential rains, only a few out of every 100 homes have flood insurance.

Please remain safe and stay healthy, enjoy the holiday weekend (Columbus Day on Monday) and first, make today great!