December 10, 2017 – November’s employment report was a repeat of what has been seen many times over the past few years: strong job creation but soft wage growth. The U.S. economy added 228,000 payrolls, while the unemployment rate remained at a 17 year low of 4.1%. The labor-force participation rate, 62.7%, also held steady. Growth in average hourly earnings rose only 2.5% year-over-year, below forecasts for 2.7%, and October’s initial 2.4% figure was revised downward, to 2.3%. Even the Fed’s preferred inflation barometer, Personal Consumption Expenditures (PCE) increased only 0.1% in October and 1.6% over the past 12 months. The “core” PCE index, which excludes food and energy, rose 0.2% and 1.4% compared to a year ago. At some point, wages and inflation are expected to rise more quickly, but for the moment, growth remains strong while inflation and wage pressure remain absent. Despite this, markets are pricing a hike in the Federal Funds rate at the upcoming FOMC meeting December 13 as a done deal. Looking to 2018, expectations are for policymakers to raise rates gradually, with three hikes in 2018 as a baseline unless the data and the Fed tell us otherwise next week.
As the prospects for tax reform gets closer to reality, equities continue to rally while bond markets are sanguine. For November, the S&P 500 gained 3.1%, its eighth consecutive monthly advance. Year to date through December 1, the index has returned over 20%. Yields on both 2- and 10-year Treasuries were little changed for the past few weeks, closing at 1.79% and 2.38%, respectively. The yield curve remains close to its flattest point in a decade as the Fed continues its slow march to raising rates. For the year, the yield on the 10 year Treasury has declined 6 basis points trading in a very narrow 50 basis point range, while the 2 year Treasury has risen 58 basis points since the beginning of the year from 1.21% to 1.79% as the Fed has gradually raised rates and expectations remain for more hikes in 2018 despite no wage or price pressures.
The Alternative Lending space remains extremely active as investors look to put money to work in the low rate, low credit spread, low volatility environment. Upstart priced UPST 2017-2, a $175 million of securities with the senior single-A minus rated tranche pricing at a 90 basis point spread, slightly tighter than 95-100 guidance. Lending Club priced their second prime securitization, CLUB 2017-P2, $314 million of securities in which its A class priced at an 85 basis point spread, 12 basis points tighter than CLUB 2017-P1 A class from September. Lending Club also completed a first-of-its-kind transaction in the alternative lending space by selling a whole loan pass through security. The $25 million transaction size was sold to a single institutional investor. Lending Club held 5% to comply with risk retention rules. The transaction is notable primarily as the whole loan security will expand the universe of buyers. SoFI priced its 6th student loan securitization, SOFI 2017-F, a $769 million deal that was upsized from an announced $565 million. Notably, the deal had the lowest WA 3-Year CDR among all SOFI deals in 2017. Barclays joined Goldman Sachs’ Marcus announcing it will originate unsecured personal loans online. Marcus has originated over $2 billion of loans so far.
Opinions expressed within the commentary are general opinions of Chris Lalli and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.
Sources: TIAA-CREF, Wall Street Journal, PeeriQ