Before we get into the Employment Report “guess,” I’d like to take a minute to bring a couple of items to your attention. First let’s talk about GMAC and their decision to exit or shall we say “scale back” the correspondent channel. 3rd Quarter losses of 210 mil largely due to a pre-tax loss of 471 mil on mortgage servicing rights (MSR) did the damage. Plans are that they will continue with the Jumbo platform but for how long the next few quarters will tell. We are seeing a reduction in mortgage servicing values, primarily due to Basel 3 and how it will effect capital requirements with respect to MSR. No one in the industry wants to see any investor leave the market. B of A started the exit and now doings at GMAC. Now onto the Big Daddy release for tomorrow, the Employment Report for October. Street expectations are as follows:
1) Non-Farm payrolls – Plus 95K
2) Private payrolls –Plus 120K
3) Unemployment rate – 9.1%
4) Average hourly earnings - .2
5) Average hourly workweek – 34.3 (who really works 34.3 hours a week?)
We see manufacturing to improve slightly after two months of decline given the positive regional surveys of late. Another factor on the plus side is that the survey weeks used in the calculation have improved, falling from an average of 428K in September to 404K in October (Weekly Unemployment). Goods producing industries have slipped a little and should be a drag on the data while the Service Producers sector should see a slight uptick. Call the two a net neutral. Government jobs will be a negative as layoffs continue at both the state and federal level. ADP projected new jobs of 110K, but at the same time we feel that B of A and others who announced layoffs last month will start to show up this month. All in all, our bias is close to consensus at plus 100K. We see the Unemployment rate holding steady at 9.1% but would not be surprised to see a 9.0% print as many have left the job search world and consequently not counted as unemployed. The fear of a much higher number seems minimal, but just the same, it would add to already improving economic data and probably push the 10 year note back towards 2.20% and pinch our mortgage pricing. A weak or “as expected” number will hold pricing steady or slightly improve as the focus will go back to Greece. So what are others saying:
1) MF Global (now in BK) Plus 75K at 9.1%
2) UBS – Plus 95K at 9.0%
3) JP Morgan – Plus 95K at 9.1%
4) Barclays – Plus 105K at 9.1%
5) Nomura – Plus 130K at 9.0%
6) Wells Fargo – Plus 70K at 9.1%
Currently the market is a volatile piece of work, down 15/32’s on the 10 year to yield 2.06% with MBS off 11/32’s.
Buckle up and stay tuned for another wild Friday.
Scott Eggen
SVP - Capital Markets
PrimeLending, a PlainsCapital Company
18111 Preston Road, Suite 900
Dallas, TX 75252
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