All Things in Moderation

Vital Statistics:

Stocks are flat this morning as we head into a 3 day weekend. Bonds and MBS are down.

Personal Incomes rose 0.4% in April, while personal consumption rose 0.8%. The PCE Price Index (the Fed’s preferred measure of inflation) rebounded in April to 0.4%. On an annual basis PCE inflation rose 4.4%. If you strip out food and energy, PCE inflation rose 0.4% on a month-over-month basis and 4.7% on a year-over-year basis.

While the PCE Price index did show an uptick in April compared to February and March, the annual rate is still working its way lower.

This will be the last PCE data before the June Fed meeting which takes place from June 13-14. We will get the May employment numbers and the May CPI before then, but the markets and the Fed-speak seem to be hinting at another hike. The Fed Funds futures are now handicapping a better-than-50% chance of another 25 basis points in June. The strong consumption numbers give them the excuse to move further away from the zero bound.

The FOMC minutes indicated that the Fed still has a tightening bias, and that comports with some of the statements from various Fed presidents over the past couple of weeks. About the only statement that indicated any sort of dovishness was this:

Participants also discussed several risk-management considerations that could bear on future policy decisions. A few assessed that there were upside risks to economic growth. However, almost all participants commented that downside risks to growth and upside risks to unemployment had increased because of the possibility that banking-sector developments could lead to further tightening of credit conditions and weigh on economic activity. Almost all participants stated that, with inflation still well above the Committee’s longer run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook. A few participants noted that they also saw some downside risks to inflation.

Even that isn’t much for doves to hang their hat on. The regional banking stress seems to have dissipated, so any resulting tightening of credit will probably fade as well. Problems in the CRE market seem to be mainly concentrated in the office sector, although the lower-tier retail spaces might have some issues as well. Rental inflation will be something to watch as we approach the peak in real estate prices a year ago and apartment completions remain elevated.

In other economic data, first quarter GDP was revised upward from an increase of 1.1% to 1.3%. Initial Jobless claims ticked up to 229k, and durable goods orders increased 1.1%.

Pending Home Sales were flat in April, according to NAR. “Not all buying interests are being completed due to limited inventory,” said NAR Chief Economist Lawrence Yun. “Affordability challenges certainly remain and continue to hold back contract signings, but a sizeable increase in housing inventory will be critical to get more Americans moving.” Unfortunately a lot of the housing starts and completions are in multi-family, not single family.

Consumer sentiment slipped in May, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment slid 7% amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low from last June. This decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged. This month, sentiment fell severely for consumers in the West and those with middle incomes. The year-ahead economic outlook plummeted 17% from last month. Long-run expectations plunged by 13% as well, indicating that consumers are concerned that any recession to come may cause lasting pain. That said, consumer views over their personal finances are little changed from April, with stable income expectations supporting consumer spending for the time being.”

This is interesting given that consumer spending remains robust. Expectations regarding future inflation fell to 4.2% after rising to 4.6% in April. Long-run inflationary expectations ticked up however, although they remain around 3%. This will concern the Fed, as it wants long-term inflationary expectations at 2%.

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Vital Statistics:

Stocks are lower this morning as investors continue to fret over the debt ceiling. Bonds and MBS are up small.

The MBA Secondary Conference just finished, and the consensus is that things are rough out there, but the mood seems hopeful that the worst is over. Here is Bob Broeksmit’s comments at the conference. Much of it discussed over-regulation, however he did say some things that give originators a sliver of hope over the spate of Fannie and Freddie repurchases:

Another policy fight we’re actively waging involves loan repurchases. As you’re well aware, Fannie and Freddie are demanding that lenders repurchase more and more loans, including seasoned performing loans, with minor underwriting issues.   

Let’s put this issue in perspective. Many of these issues were the result of the unprecedented number of loans you processed in the early days of the pandemic. They reflect your swift action, during a national emergency, to help as many people as possible, as quickly as possible.   

Not long ago, that action earned you well-deserved praise. Now, for all your heroic efforts, the GSEs are punishing you. They want you to buy back loans when interest rates are twice as high. That would be disastrous, putting further strain on your balance sheets.   

But it doesn’t have to be this way. When it comes to loans with minor issues and seasoned performing loans, you should be allowed to address those issues through steps far short of repurchase. We’re making this point to the GSEs and FHFA regularly, and I’m confident you’ll see relief soon.  

In the face of declining volumes and margins repurchases can put a lender out of business as we saw in 2008.

Mortgage Applications fell 4.6% last week as purchases fell 4% and refis fell 5%. “Mortgage applications declined almost five percent last week as borrowers remained sensitive to higher rates. The 30-year fixed rate increased to 6.69 percent, the highest level since March,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Since rates have been so volatile and for-sale inventory still scarce, we have yet to see sustained growth in purchase applications. Refinance activity remains limited, with the refinance index falling to its lowest level in two months and more than 40 percent below last year’s pace.”

If you look back long-term the state of the mortgage market is the worst in 25 years.

New home sales rose 4.1% on a MOM basis to a seasonally adjusted annual pace of 656,000. New home sales rose 11% on a YOY basis. The median new home price fell 8.2% YOY to $420,800, while the average home price fell 10.9% to $501,000.

Home prices peaked around June of last year, so we should start seeing the decline in prices percolate through to the inflation indices. That said, the Fed seems to be on a mission to take advantage of the robust labor market to build some distance from the zero bound which gives it more breathing room to ease if the economy slows.

The Fed Funds futures are now handicapping a 38% chance of another 25 basis point hike in June.

Filed under: Economy | 19 Comments »

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat.

The week ahead has some important economic data with new home sales, GDP and Personal Incomes / Outlays. The Personal Income / Outlays report contains the Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation. Markets will close early on Friday for the Memorial Day Weekend.

We will also get the minutes from the May FOMC meeting on Wednesday. That will be interesting since there should be plenty of discussion about the regional bank situation. I want to see how many voters were willing to pause rate hikes, but went along with the consensus.

Minneapolis Fed President Neel Kashkari said that even if the Fed pauses rate hikes in June, the markets shouldn’t take that as an all-clear signal. “Right now it’s a close call either way, versus raising another time in June or skipping,” the central bank official said on CNBC’s “Squawk Box.” “Some of my colleagues have talked about skipping. Important to me is not signaling that we’re done. If we did, if we were to skip in June, that does not mean we’re done with our tightening cycle. It means to me we’re getting more information. Markets seem very optimistic that rates are going to fall now. I think that they believe that inflation is going to fall, and then we’re going to be able to respond to that. I hope they’re right,” he added. “But nobody should be confused about our commitment to getting inflation back down to 2%.”

Despite 500 basis points of tightening, the economy remains quite strong. The Atlanta Fed’s GDP Now Index sees Q2 growth at 2.9%.

Troubled regional bank PacWest is up this morning after reaching a deal to sell a portfolio of construction loans to an investment firm. The regional banks are all up in sympathy this morning.

Mortgage applications for new home sales rose 4.1% in April, according to the MBA. “Purchase applications for newly constructed homes declined in April but were up 4 percent compared to a year ago,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “This was the third straight month of year-over-year growth in applications, which signals improving housing demand for newly built homes at a time when the broader housing market is leaning more on new construction to boost for-sale inventory levels. Mortgage rates have settled in the 6.5 percent range lately and remain over a percentage point higher than last year. The higher mortgage rate environment continues to factor into homebuying and selling decisions.”  

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down. Jerome Powell will be speaking at 10:00 am.

Bond yields have been climbing, much to the chagrin of mortgage bankers. Over the past week, the 10 year has tacked on 24 basis points in yield. Some of this is probably due to hawkish comments out of the Fed, but it appears to be global, with the German Bund, UK Gilt, and Japanese Government Bond all moving up in lockstep.

I suspect some people have been hoping that this increase was driven by debt ceiling theater and once we get a resolution yields will begin falling. That might not be in the cards unless the US hits a recession. Note the Atlanta Fed GDP Now model sees 2.9% growth in Q2, which is pretty robust. That said, the GDP Now model was consistently too high in Q1.

Independent Mortgage Banks lost $1,972 on each loan they originated in Q1, according to the MBA. This is an improvement from the $2,812 they lost in the fourth quarter.

“A net production loss of 68 basis points in the first quarter of the year is an improvement over the record 99-basis-point loss reported in the fourth quarter of 2022,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Conditions continue to be challenging for the industry, with now four consecutive quarters of production losses and nine consecutive quarters of volume declines.”

Added Walsh, “One silver lining from the first quarter is that production revenues improved by 40 basis points. However, costs continued to escalate with the further drop in volume and reached more than $13,000 per loan despite substantial personnel reductions.”

The Index of Leading Economic Indicators declined again in April, according to the Conference Board. “The LEI for the US declined for the thirteenth consecutive month in April, signaling a worsening economic outlook,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Weaknesses among underlying components were widespread—but less so than in March’s reading, which resulted in a smaller decline. Only stock prices and manufacturers’ new orders for both capital and consumer goods improved in April. Importantly, the LEI continues to warn of an economic downturn this year. The Conference Board forecasts a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023.”

Filed under: Economy | 27 Comments »

Vital Statistics:

Stocks are flattish this morning as retail earnings come in. Bonds and MBS are down.

Bonds are down this morning after Dallas Fed President Lorie Logan said that inflation is still too high to consider pausing rate hikes. “The data in coming weeks could yet show that it is appropriate to skip a meeting,” Logan said in remarks prepared for delivery to the Texas Bankers Association in San Antonio, referring to the Fed’s twice-quarterly policy-setting meetings, the next of which takes place June 13-14. “As of today, though, we aren’t there yet.” The June Fed Funds futures are now handicapping a 37% chance of another 25 basis point hike at the June meeting.

The debt ceiling issue isn’t helping either, but for the most part it is nothing more than kabuki theater. The debt ceiling always gets raised, and if it doesn’t the government “shuts down” which usually means they close down the parks in Washington DC and not much else. Principal and interest on the debt still gets paid. FWIW, it looks like both sides are inching towards a deal.

WalMart reported strong comp sales this morning, bucking the trend seen by Home Depot and Target. It looks like WalMart is a beneficiary of inflation, as shoppers eschew more expensive stores and bargain-hunt.

Existing home sales fell 3.4% in April, according to NAR. On a YOY basis, sales were down 23.2%. The median home price fell 1.7% compared to a year ago. “Roughly half of the country is experiencing price gains,” Yun noted. “Even in markets with lower prices, primarily the expensive West region, multiple-offer situations have returned in the spring buying season following the calmer winter market. Distressed and forced property sales are virtually nonexistent.” Inventory rose 7% MOM and 1% YOY.

In other economic news, initial jobless claims fell to 242k, while the Philly Fed Index improved, while remaining negative. The Philly Fed index showed that price inflation dropped to the lowest level since mid-2020. The prices received index declined for the third month in a row and hit -3.3, which means more companies are reporting decreases in prices received than increases. FWIW, it looks like the prices diffusion index is back to normal.

Filed under: Economy | 13 Comments »

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down.

We are starting to see a slowdown in consumer spending as the Fed’s drastic tightening cycle begins to gain traction on the economy. Yesterday, Home Depot reported weaker earnings, particularly on big-ticket items like grills and furniture. Today, Target reported first quarter earnings, and forecasted low single-digit comps for the rest of the year. Consumers are buying more non-discretionary items and buying fewer discretionary items. This comports with studies that show consumers are saving more amidst fears of a recession.

Housing starts rose 2.2% MOM to a seasonally-adjusted annual rate of 1.4 million. This is a 2.2% increase from March, but is down 22% from a year ago. Building Permits fell 1.5% MOM and 21% YOY to a seasonally-adjusted annual rate of 1.4 million.

Western Alliance gave an update on deposits after the close yesterday. Deposits have increased by $2 billion since the end of Q1. Insured deposits are over 79% and the company is close to completing the sale of about $3 billion in loans held for sale. The stock is up 13% pre-open.

Mortgage Applications decreased 5.7% last week as purchases fell 4.8% and refis fell 8%.

“Mortgage rates increased last week even as Treasury yields were essentially flat, with the spread between the two rates widening to 310 basis points. Mortgage application activity slowed, as most mortgage rates in the survey increased, with the 30-year fixed rate jumping nine basis points to its highest level in two months at 6.57 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications decreased 5 percent to its slowest pace in a month, as buyers remain wary of this rate volatility, but also as for-sale inventory in many parts of the country remains scarce. Refinance applications accounted for 27 percent of all applications and dropped almost 8 percent last week. Most borrowers have lower rates on their mortgages, and those who are in the market are extremely rate sensitive.”

You can see the difference between the 30 year fixed rate mortgage and the 10-year in the graph below: We are back at levels last seen during October and the Great Recession:

Prior to the Great Recession the last time spreads were this high was the early 1980s.

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Vital Statistics:

Stocks are lower after a weak retail sales report. Bonds and MBS are down.

Retail Sales rose 0.4% MOM in April, according to Census. Sales rose 1.6% on a YOY basis, however these numbers don’t take into account price changes, so on an inflation-adjusted basis retail sales are down. March’s numbers were revised upward slightly.

If you strip out autos and gas, retail sales rose 0.6% MOM. We saw big decreases in electronics, furniture and gasoline. Food and drinking establishments saw big gains.

Separately, the Home Despot reported a big miss on the top line and guided for lower comparable sales for the rest of the year. Falling lumber prices is playing a part here, although it appears that homeowners are putting bigger remodeling projects on the back burner. Chief Financial Officer Richard McPhail told CNBC “The state of the homeowner is that they’re very healthy,” he said. “They have healthy balance sheets. They have healthy incomes. But I do think — and our professional customers tell us they hear this from their customers — there is that shift, even if it’s temporary from larger projects into smaller ones.”

Homebuilder sentiment improved in May according to the NAHB. After dropping at the end of 2022, sentiment is improving. Traffic remains low, and lumber prices continue to work their way lower.

Industrial Production rose 0.5% in April, according to the Fed. February and March were revised lower. Manufacturing production rose 1% and capacity utilization fell to 79.7%. Overall, it looks like manufacturing is sluggish. This is despite a sizeable drop in the US dollar over the past 6 months.

The FHFA is requesting input on G-fees. “Through this RFI, FHFA seeks input on how to ensure the pricing framework adequately protects the Enterprises and taxpayers against potential future losses, supports affordable, sustainable housing and first-time homebuyers, and fosters liquidity in the secondary mortgage market,” said Director Sandra L. Thompson. “We are committed to being transparent and to considering views from a diverse set of stakeholders and market participants.”

I am accepting ads for this blog if you would like to make an announcement, highlight something your company is offering or want more visibility. I also offer white-label services which give you the ability to use this content for your own daily emails. The blog has over 5,000 followers and an open rate around 50%. Please feel free to reach out to nyitray@hotmail.com if you would like to discuss this further.

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Vital Statistics:

Stocks are higher this morning as investors reach for risk. Bonds and MBS are down.

The week ahead won’t have much in the way of market-moving data, but we will get a lot of housing indicators with housing starts, existing home sales and homebuilder sentiment.

Business activity increased in New York State last month, according to the Empire State Manufacturing Survey. New orders and shipments surged, while employment remains weak. Inflation continues to trend down, with input prices falling while prices received were flat.

Atlanta Fed Chairman Raphael Bostic doesn’t see rate cuts this year, as inflation is still too high. “What we’ve seen is that inflation has been persistently high, consumers have been really resilient in terms of their spending, and labor markets remain extremely tight. All of those suggests that there’s still going to be upward pressure on prices,” he said. “If there’s going to be a bias to action, for me would be a bias to increase a little further as opposed to cut.”

PacWest is down again pre-market and were are getting more discussion about banning short selling in bank stocks. FWIW, I have always been skeptical about short selling bans in general – governments only step in after the easy money has been made, and in many cases the borrow in these names is already expensive.

When you short a stock, you have to find someone to lend you the stock to sell. This borrowed stock is what you deliver to the buyer on trade settlement date. Your prime broker will charge you a fee to borrow that stock, and we are seeing fees in the high teens and up. This means that your prime broker is lending you PacWest stock at a 20% fee, you will be paying about 40 basis points a week to maintain that position.

I think at this point, short sellers are not driving the price action in these names. There simply isn’t a deep borrow in these names and it costs a lot of money to borrow them. I suspect that many holders of these stocks will simple choose to not lend them out any more, which will make it difficult to short in the first place, and may force people with established short positions to exit them.

Lending standards are tightening across the board, especially for commercial real estate and residential lending. For residential, the tightening was more pronounced in jumbo and Non-QM as opposed to GSE and government loans. We are seeing weaker demand for HELOCs and other residential real estate loans.

Banks are also tightening standards on multi-fam, by increasing spreads, hiking covenants and lowering LTVs.

I am accepting ads for this blog if you would like to make an announcement, highlight something your company is offering or want more visibility. I also offer white-label services which give you the ability to use this content for your own daily emails. The blog has over 5,000 followers and an open rate around 50%. Please feel free to reach out to nyitray@hotmail.com if you would like to discuss this further.

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are flat.

Consumer sentiment slipped in May, according to the University of Michigan Consumer Sentiment Survey. This is down 9.1% from April. Consumer expectations fell 11% despite a strong labor market. Inflationary expectations for the near term fell, while longer-term expectations rose to 3.2%, the highest level in 12 years.

We know the Fed pays close attention to the UM inflationary expectations, so this is bad news for those hoping for rate cuts this year.

Mortgage delinquency rates fell 3.56% in the first quarter, according to the MBA. This is down 40 basis points from the fourth quarter and 55 basis points from a year ago.

“The mortgage delinquency rate fell to its lowest level for any first quarter since MBA’s survey began in 1979 and was the second lowest quarterly rate overall, just 11 basis points above the survey low in the third quarter of 2022,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Mortgage delinquencies and the unemployment rate continue to track each other closely, with the unemployment rate in April falling back to the 54-year low of 3.4 percent set in January. Consistent with the resilient job market, the performance of existing mortgages is exceeding expectations. Across all states, there was an improvement in the first quarter compared to one year ago. Year-over-year delinquencies for all product types – FHA, VA, and conventional – were also down.”

Unemployment and delinquencies correlate pretty tightly:

Fed Governor Michelle Bowman spoke in Germany this morning. Here are her prepared remarks. Her comments were pretty hawkish on monetary policy, and nothing remote suggests rate cuts are coming in the near future, though the Fed Funds futures see cuts as imminent.

In my view, our policy stance is now restrictive, but whether it is sufficiently restrictive to bring inflation down remains uncertain. Some signs of slowing in aggregate demand, lower numbers of job openings and more modest gross domestic product (GDP) growth indicate that we have moved into restrictive territory. But inflation remains much too high, and measures of core inflation have remained persistently elevated, with declining unemployment and ongoing wage growth. And, as senior loan officers signaled beginning last summer, credit has continued to tighten.² I expect this trend will continue given increased bank funding costs and reduced levels of liquidity.

Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time. I also expect that our policy rate will need to remain sufficiently restrictive for some time to bring inflation down and create conditions that will support a sustainably strong labor market.

Filed under: Economy | 25 Comments »

Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are up on the PPI data. The Bank of England hiked by 25 bp this morning.

Inflation at the wholesale level came in at 0.2% month-over-month and increased 2.3% on a year-over-year basis. Ex-food and energy, prices rose 0.2% MOM and 3.4% YOY. These numbers were below expectations, and bonds are rallying on the news.

Initial Jobless Claims rose to 264k last week. You can see in the chart below that the claims are on the way up, after a long period at 50 year lows.

The Fed Funds futures have taken further rate hikes off the table, and are handicapping a roughly 50% chance of a 25 basis point cut at the July meeting.

The FHFA has announced it will rescind the upfront fees based on borrowers’ DTI. “I appreciate the feedback FHFA has received from the mortgage industry and other market participants about the challenges of implementing the DTI ratio-based fee,” said Director Sandra L. Thompson. “To continue this valuable dialogue, FHFA will provide additional transparency on the process for setting the Enterprises’ single-family guarantee fees and will request public input on this issue.”

United Wholesale reported first quarter volume of $22.3 billion, which was a 11% decline from the fourth quarter and 43% decline from a year ago. Gain on sale rebounded to 92 bps from 51 in the fourth quarter. They were still down from 99 bp a year ago. The company forecasts Q2 volume between $23 and $30 billion, with gain on sale margins from 75 to 100 bps.

Western Alliance gave an update on its deposit situation. Total deposits were 49.4 billion, up $1.8 billion from the end of last quarter and up $600 million from last week. Insured deposits are 79% and liquidity covers uninsured deposits by 2x.

PacWest said that deposits fell by 9.5% in the week ended May 5. Available liquidity is about 3x the level of uninsured deposits. The regional banks continue to be under pressure overall, as the S&P SPDR regional bank ETF is down 38% YTD.

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