Morning Report: Jerome Powell heads to the Hill.

Vital Statistics:

S&P futures4,2195.8
Oil (WTI)73.19-0.34
10 year government bond yield 1.51%
30 year fixed rate mortgage 3.23%

Stocks are up as we await Jerome Powell’s testimony in front of Congress. Bonds and MBS are down.

Fed Chairman Jerome Powell heads to the Hill today for testimony about the economy. Here are his prepared remarks. He discusses the uptick in inflation and why it is temporary:

Inflation has increased notably in recent months. This reflects, in part, the very low readings from early in the pandemic falling out of the calculation; the pass-through of past increases in oil prices to consumer energy prices; the rebound in spending as the economy continues to reopen; and the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.

He sees the labor market recovery as “uneven,” as the labor force participation rate remains low.

As with overall economic activity, conditions in the labor market have continued to improve, although the pace has been uneven. The unemployment rate remained elevated in May at 5.8 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. Job gains should pick up in coming months as vaccinations rise, easing some of the pandemic-related factors currently weighing them down.

The big question regarding inflation will revolve around wage growth. The latest JOLTS job openings report showed a marked uptick in the quits rate, which generally precedes wage growth. Presumably people are quitting their jobs to take ones that pay better.

I think the punch line for the economy is that visibility is super-low right now. We have elevated unemployment along with record job openings. We also have a global sovereign debt bubble at the same time that governments have a voracious appetite for spending. It remains an open question how long investors will purchase government debt at negative inflation-adjusted interest rates. Global central banks may have painted themselves into a corner with such broad-based asset support.

Cryptocurrencies are getting whacked as China cracks down on non-governmental stores of value. It wants to shut down all Bitcoin mining operations and has warned financial institutions against converting crypto to cash. I am not sure that governments can put the genie back into the bottle, though most will try, arguing that the only people who care about crypto are criminals, speculators, and conspiracy theorists. Perhaps, but we have seen a flood of new governmental money-printing combined with a sovereign debt bubble.

Blackstone looks to get back into the single-family rental business. After launching Invitation Homes in the aftermath of the real estate bubble, it floated Invitation and exited in 2019. With real estate prices soaring, it has inked a deal to buy Home Partners of America for $6 billion. HPA’s model is different than Invitation or American Homes 4 Rent as Blackstone explains: “The fundamental premise of the HPA platform is to provide residents with the opportunity to live in their chosen home with the option to purchase it—we intend to build on that goal and expand access to homes across the U.S. We look forward to working with HPA’s leadership team to further invest in the properties and continue its role as a valuable resource for people considering home purchases.”

Morning Report: Putting the current inflation numbers into perspective.

Vital Statistics:

S&P futures4,17422.8
Oil (WTI)71.82-0.34
10 year government bond yield 1.47%
30 year fixed rate mortgage 3.22%

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

The 10-year traded as low as 1.36% in the overnight session. Not sure what was driving that, but after the FOMC increase in rates last week based on the updated dot plot, the 10 year has done nothing but fall in yield. Like usual, mortgage backed securities (which determine mortgage rates) have been lagging the move.

We will have a decent amount of economic data this week with existing home sales, new home sales, personal incomes and spending, and GDP. The GDP number is the third estimate for the first quarter. We will also have a lot of Fed-Speak.

The economy picked up in May, according to the Chicago Fed National Activity Index. That said, the number came in way below expectations. The CFNAI is sort of a meta-index of 85 different economic indictors. The COVID lockdowns of a year ago are introducing all sorts of noise into just about every economic statistic. The punch line is that economic growth has probably peaked for the year.

Invitation Homes CEO Dallas Tanner is sanguine about the housing market: “I would expect that home prices stay relatively stable, if not continue to grow in value for the homeowners in the country, but we’ll find our ways to pick our spots whether through our partnerships with builders or our ability to buy one-off,” Tanner said. “We view the housing environment overall as extremely healthy.”

With the big increases in housing prices this year, the media types are asking questions about whether we have another housing bubble, similar to 2006. The United States does not. Other countries do. Housing bubbles are quite rare, and only come around once or twice a century. A lot of pieces need to be in place to create one, and the biggest one is a belief amongst buyers, sellers, lenders, and regulators that an asset is “special” and cannot fall in price. Anyone who is old enough to sign a mortgage doc knows that isn’t the case.

Buyers are beginning to balk at higher home prices, according to a report from Redfin. Its Homebuyer demand index peaked about 9 weeks ago, and is down 14% since. “Offers no longer pour in the day a home hits the market,” said Phoenix Redfin real estate agent John Biddle. “It has become more common for offers to come in at least a few days after a home is listed for sale. If this were three years ago, we’d marvel at how fast the market was, but it’s a clear slowdown from a few weeks ago. Now that things are opening up again and the summer is almost here, people have other priorities, like going on vacation. Plus, many homebuyers are frustrated and tired of competing, so they’ve stepped back—for now at least.”

With inflation rising, it is helpful to put the numbers in perspective. Inflation is going to be high for the rest of the year as shortages and COVID noise drive up the numbers. The Fed predicts that the Personal Consumption Index will rise 3.5% this year. Take a look at the chart below and see what that looks like historically.

Not too dramatic, is it? Certainly not like the 1970s, which were driven mainly by oil prices. If anything we are headed back to historical norms after a bout of exceptionally low inflation. The question the Fed is grappling with is how much of the current inflation is due to COVID and how much is not. That will depend largely on wage growth, and given the seemingly ubiquitous “help wanted” signs these days these price increases may turn out to be more permanent.

Morning Report: Strongest LEI report ever

Vital Statistics:

S&P futures4,184-25.8
Oil (WTI)70.82-0.34
10 year government bond yield 1.50%
30 year fixed rate mortgage 3.20%

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

The Federal Government made Juneteenth a Federal holiday. Government offices are shut. The Federal Reserve will remain open today, and the implications of a surprise holiday will mean all sorts of things with respect to TRID and recission periods etc.

The Index of Leading Indicators hit a record in May, according to the Conference Board. “After another large improvement in May, the U.S. LEI now stands above its previous peak reached in January 2020 (112.0), suggesting that strong economic growth will continue in the near term,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Strengths among the leading indicators were widespread, with initial claims for unemployment insurance making the largest positive contribution to the index; housing permits made this month’s only negative contribution. The   Conference Board now forecasts real GDP growth in Q2 could reach 9 percent (annualized), with year-over-year economic growth reaching 6.6 percent for 2021.”

More than half of all home sales occurred above the listing price, according to Redfin. We are seeing record price appreciation, where Phoenix (33%), Austin (42%), and Detroit (32%) had the biggest increases, while San Francisco was flattish. “Homes in the Inland Empire are still affordable compared to nearby coastal areas like Santa Monica, OC, or San Diego, but they’re nearly double what they used to be just a few years ago,” said Inland Empire, CA Redfin real estate agent Keith Thomas. “Locals are scratching their heads and wondering how they can afford a home as people move into Riverside County and the high desert from LA, Burbank, and other more expensive areas. Many are remote workers looking for something more affordable.”

With lumber prices coming back to Earth, I think we will see an acceleration in homebuilding going forward. Places like Austin, Phoenix aren’t restricted by geography the way many West Coast areas are. Those places can build out and create exurbs, which should alleviate upward price appreciation. Still, that will take some time to come on line. Interestingly, the only places where we saw increases in supply were areas people are fleeing: San Francisco, New York, and Philly.

The Fed is likely to go slower this time getting off the zero bound. The consensus of the FOMC seems to be two rate hikes in 2023. One area of concern will be the pace of reduction in purchases of Treasuries and MBS. The Fed wants to avoid another “taper tantrum” like it had in 2013. Note that the 10-year has shrugged off Wednesday’s hawkish FOMC statement already.

Morning Report: The Fed raises its inflation forecast

Vital Statistics:

S&P futures4,198-22.8
Oil (WTI)71.82-0.34
10 year government bond yield 1.55%
30 year fixed rate mortgage 3.20%

Stocks are lower this morning after the FOMC decision. Bonds and MBS are up small.

The Fed made no changes to policy, however the dot plot showed a faster path of interest rate hikes than previously forecast. You can see the comparison of March versus June below:

The big takeaway is that in March, it was looking like we wouldn’t see any hikes until 2024. Now it looks like we will see rates begin to rise in 2023.

Bonds initially reacted pretty negatively to the release, with the 10 year moving up to 1.59% and MBS trading down a point or so.

The Fed took up their projections for GDP growth this year from 6.5% to 7%, but the number that got everyone’s attention was the inflation forecast, which was taken up from 2.4% to 3.4%. Supply bottlenecks are believed to be driving the increase in inflation this year, which means that it will be a temporary phenomenon as inventories catch up to demand. In his press conference, Jerome Powell noted that longer-run inflationary expectations seem to be unchanged, which gives the bank comfort that price increases this year will revert back to normal. If longer-run inflationary expectations start to creep up, then the Fed will get more concerned.

Jerome Powell also addressed the labor market, and the fact that we have high unemployment while companies have lots of unfilled positions. He attributed it to workers having a fear of getting COVID, expanded unemployment insurance, and workers having to take care of sick family members. The labor market remains a mystery, but I think the punch line is that wages are going up, and that means inflation may more persistent than the Fed is thinking. As Keynes noted, wages are sticky – commodity prices are not.

Speaking of the labor market, initial jobless claims increased last week to 412,000. It seems like every business has a “help wanted” sign, but unemployment claims remain stubbornly high.

New home mortgage applications fell for the second straight month due to inventory constraints. They fell 9% compared to April, but also 6% from a year ago. Given that we were under lockdown a year ago, that is a surprising number. “Mortgage applications to purchase a new home decreased in May for the second straight month, while the average loan size, at $384,000, increased for the fourth consecutive month,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Loan balances continue to rise because of a larger share of sales in the higher end of the market, as well as increased sales prices from strong demand and elevated building material costs.” 

Morning Report: Housing starts disappoint

Vital Statistics:

S&P futures4,2372.8
Oil (WTI)72.320.24
10 year government bond yield 1.49%
30 year fixed rate mortgage 3.14%

Stocks are flat as we await the FOMC decision. Bonds and MBS are flat.

The FOMC decision will be released at noon today. The markets will be listening for language pointing towards an end of MBS and Treasury purchases as well as the dot plot. I also think markets will be sensitive to how the Fed describes the state of the economy. Finally, I hope they discuss what is driving the current labor shortage and offer up a reasonable explanation for it.

Speaking of disappointing economic data, housing starts came in below expectations. Starts came in at 1.57 million, while permits came in at 1.68 million. Starts were more or less flat with April, while permits showed a small uptick. Labor and materials shortages are probably behind the disappointing numbers. That said, homebuilder sentiment remains elevated, despite challenges with input costs and labor.

Mortgage applications rose 4.2% last week as purchases increased 2% and refis rose 6%. Rates have been coming back down, which is increasing refi opportunities. “U.S. Treasury yields have slid because of the uncertainty in the financial markets regarding inflation and how the Federal Reserve may act over the next few months,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity also rebounded, even as supply constraints continue to slow the housing market. An almost 5 percent increase in government purchase applications drove most of last week’s gain while also tempering the recent growth in loan sizes. Purchase applications were still down 17 percent from a year ago, which was when the mortgage market started seeing large post-shutdown increases in activity.”

Note that NAR believes we have a 5.5 million unit gap in housing demand versus supply.

Mortgage credit availability rose in May, according to the MBA. “Mortgage credit availability in May increased to its highest level since near the start of the pandemic, but still remained at 2014 levels. The increase was driven by a 3 percent gain in the conventional segment of the market, with a rise in the supply of ARMs and cash-out refinances. This is consistent with the uptick in mortgage rates and a slowing refinance market, as well as MBA’s Weekly Applications Survey data showing increased interest in ARMs,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The jumbo index jumped 5 percent last month, but even with increases over the past two months, the index is still around half of where it was in February 2020. A rapidly improving economy and job market has freed up jumbo credit, as banks have deposits to utilize. However, there is still plenty of restraint, as many sectors have not fully returned to pre-pandemic capacity, and there are around 2 million borrowers still in forbearance.” 

Morning Report: Retail Sales disappoint

Vital Statistics:

S&P futures4,2472.8
Oil (WTI)71.620.74
10 year government bond yield 1.50%
30 year fixed rate mortgage 3.14%

Stocks are flattish after a disappointing retail sales number. Bonds and MBS are down small.

The Fed starts its two-day meeting today. The announcement will be tomorrow at 2:00 PM. Bond yields have been slowly declining over the past week or two ahead of the meeting.

Retail Sales fell 1.3% in May. Ex-autos and gas, they fell 0.8%. These numbers were well below Street expectations. On a year-over-year basis, they are up smartly, but this is due to comparisons versus lockdowns. Since consumption is something like 70% of GDP, I find it strange to see the high GDP estimates given this backdrop.

As an aside, regarding retail sales etc, I was at the New England Mortgage Expo which was held at Mohegan Sun, a massive casino complex in Connecticut. The Expo usually has something like 2,000 people attending. If I had to venture a guess, I would say a few hundred attended. The other thing I noticed was the casinos were deserted. The vast majority of the blackjack tables were empty, with no dealers and no gamblers. Very few people playing slots. I heard that the casinos were having a horrible time finding workers as well.

Delinquencies fell to the lowest rate in a year, according to CoreLogic. 4.9% of mortgages were 30 days down. The foreclosure inventory rate was 0.3%, but that number is being held down artificially by the foreclosure moratorium. The eviction moratorium expires at the end of June. The CFPB supposedly plans to extend the foreclosure moratorium until the end of the year.

Inflation at the wholesale level rose 0.8% month-over-month and 6.6% year-over-year. Ex-food, energy, and trade services prices rose 0.7%. Raw material prices are behind the increases. That said, additional supply is coming on line, which should ease the pressure. Note that lumber is down about 40% from its peak a month ago.

The Fannie Mae Mortgage Lender Sentiment Survey shows that lenders expect profit margins to contract. “Despite elevated optimism toward the U.S. economy, lenders show a cautious outlook for their mortgage business,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “This quarter, the largest net percentage of lenders in the survey’s seven-year history are expecting a decrease in their profit margin outlook. This is the third quarterly decline from the lender profitability highs of 2020. Those who expected a lower profit margin continued to cite competition from other lenders and market trend changes as the primary reasons. Lenders reported a significant refinance demand decline over the past three months and expect the decline to continue, with their refinance demand growth expectations reaching the lowest level seen since Q4 2018. With the shift from refinance to purchase business, some lenders commented that purchase transactions are harder to complete and have lower margin.”

Industrial production rose 0.8% in May, while manufacturing production rose 0.9%. Capacity Utilization rose to 75.2%.

Morning Report: The Atlanta Fed sees second quarter GDP rising 9.3%

Vital Statistics:

S&P futures4,2370.8
Oil (WTI)71.570.64
10 year government bond yield 1.47%
30 year fixed rate mortgage 3.12%

Stocks are flat as we head into Fed week. Bonds and MBS are up.

Aside from the FOMC meeting (which will also include a fresh set of projections), we will also get some important economic data with retail sales, the producer price index, and housing starts.

The Street is looking for the Fed’s dot plot to show rates increasing in 2023, and to start discussing tapering of MBS purchases later this year.

The MBA sent a letter to the Biden Administration calling for an end to the nationwide eviction moratorium when it expires on June 30. “As the pandemic comes under better control, we look forward to working with the Administration to end unsustainable nationwide federal restrictions on property operations, implement workable solutions for renters facing housing instability and help the country recover,” the coalition said.

The Atlanta Fed’s GDP Now forecast sees 9.3% GDP growth for the second quarter. Note that this forecast excludes some of the COVID-19 related effects and assumptions.

Pending home sales are slowing, according to Redfin. “While the market has not come to a full stop, we are seeing signs of yielding,” said Westchester County, NY Redfin real estate agent Candice Smith. “Buyers are winning bidding wars with offers that are $60,000 or less over asking prices; just a month ago in similar situations they had to go $100,000 or more over asking. Bidding wars are still the norm, but the number of competing offers have been cut in half from around 17 to about eight. Homebuyers still need to be strategically creative when submitting their highest and best offer, which involves methods like offering to cover an appraisal gap upfront, dropping the appraisal or mortgage contingency altogether or adding escalation clauses.”

You can see several indicators of demand cooling off in the chart below.

Mortgage REIT AGNC Investment reported a 6.5% drop in book value in the month of May. I don’t think MBS pricing got hit that hard, but that is a surprising report.

Morning Report: Inflation comes in hotter than expected

Vital Statistics:

S&P futures4,2232.8
Oil (WTI)70.370.34
10 year government bond yield 1.52%
30 year fixed rate mortgage 3.14%

Stocks are flattish this morning after inflation came in higher than expected. Bonds and MBS are down.

Inflation at the consumer level rose 0.6% MOM and 5% YOY. Given the lockdowns of a year ago, the annual numbers will have a lot of noise in them. Used vehicles accounted for a third of the increase. Ex-food and energy, the index rose 0.7% MOM and 3.8% YOY.

Housing is poised to push up the inflation numbers going forward, according to research from Fannie Mae. The inflation metrices attempt to capture home price appreciation via a concept called owners equivalent rent. Owners equivalent rent is a pretty lagged variable, which means that it probably won’t filter into the inflation numbers until 2022.

Initial Jobless Claims rose to 376,000 last week. Given the tightness of the labor market, it is surprising to see initial claims so elevated. Pre-COVID, they were in the low 200ks on average.

Home equity rose 19%, or about $1.9 trillion in the first quarter, according to CoreLogic. Negative equity fell about 24% to 1.8 million homes. This rise in equity will make cash-out refis a much bigger chunk of business going forward. “Homeowner equity has more than doubled over the past decade and become a crucial buffer for many weathering the challenges of the pandemic,” said Frank Martell, president and CEO of CoreLogic. “These gains have become an important financial tool and boosted consumer confidence in the U.S. housing market, especially for older homeowners and baby boomers who’ve experienced years of price appreciation.”

A bipartisan group of Senators are trying to craft an infrastructure plan that avoids tax hikes. This will be a tug-of-war between the left which wants to hike taxes and Republicans who are dead-set against raising them. While the Democrats nominally control the Senate, they will need 10 Republicans to go along to get a plan through.

Morning Report: The quits rate might be signaling future wage growth.

Vital Statistics:

S&P futures4,2339.8
Oil (WTI)70.340.33
10 year government bond yield 1.49%
30 year fixed rate mortgage 3.14%

Stocks are flattish this morning as oil rises above $70 per barrel. Bonds and MBS are up again.

The 10 year bond yield has started falling again, and this seems to be a global trade. The German Bund is back to negative 25 basis points, and just about every other sovereign bond yield is dropping. Some of this is a reversal of early-taper bets. Mortgage rates have been lagging the move as usual. Note the World Bank is forecasting that global growth will hit 5.6% this year, which would be the fastest growth since 1940. This would be incongruous with current bond yields, but with global central banks intervening so much in the market it might be useless as an economic signal.

Mortgage Applications fell 3.1% last week as purchases increased 0.3% and refis fell 13%. “Most of the decline in mortgage rates came late last week, with the 30-year fixed-rate mortgage declining to 3.15 percent. This likely impacted refinance applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “With fewer homeowners able to take advantage of lower rates, the refinance share dipped to the lowest level since April. Purchase applications were up slightly last week, and the large annual decline was the result of Memorial Day 2021 being compared to a non-holiday week, as well as the big upswing in applications seen last May once pandemic-induced lockdowns started to lift.”

Job openings hit a record high of 9.3 million at the end of April, according to the JOLTS job openings report. The biggest increase in openings came in food services. The quits rate hit 2.7%, and 4 million employees, both series records. Increases in the quits rate generally precedes increases in wages, and if the relationship holds, we should expect to see wage inflation into the second half of the year.

The increase in wages will undoubtedly contribute to further home price appreciation. I would expect to see this filter down into more esoteric mortgage products, as home price appreciation makes taking credit risk more appealing.

Morning Report: Small Business is getting more pessimistic on the economy

Vital Statistics:

S&P futures4,2359.8
Oil (WTI)69.340.11
10 year government bond yield 1.53%
30 year fixed rate mortgage 3.17%

Stocks are higher this morning on no major news. Bonds and MBS are up.

Almost half of small businesses report being unable to fill job openings, according to the NFIB Small Business Optimism Survey. “Small business owners are struggling at record levels trying to get workers back in open positions,” said NFIB Chief Economist Bill Dunkelberg. “Owners are offering higher wages to try to remedy the labor shortage problem. Ultimately, higher labor costs are being passed on to customers in higher selling prices.”

I found one particular aspect of the report interesting:

While the consensus from the Fed and most economists is that the economy is poised to accelerate into the second half of the year, this survey sees increased pessimism. Expected earnings trends are down as well. That said, the survey also showed increasing numbers for the “good time to expand” issue, so maybe it is just some weirdness in the data. A tight labor market and a weakening economy don’t generally go together.

If NFIB is correct and earnings trends are heading downward, that is a canary in the coal mine. Stocks gotta be vulnerable here. I wonder if that report explains some of the move in the 10-year this morning.

Freddie Mac lowered the limit of NOO / Second homes it will buy from 7% to 6% yesterday.

To complement those efforts, we have updated our requirements for Investment Property and second home Mortgages as follows: for the month of July 2021, if the Seller sells more than five Mortgages secured by second homes and/or Investment Properties, the Seller’s deliveries of such Mortgages may not, by measure of aggregate UPB, exceed 6.5% of the total UPB for all Mortgages sold during that month. After July, on a monthly basis, if the Seller delivers more than five Mortgages secured by second homes and/or Investment Properties, deliveries of such Mortgages may not exceed 6% of the total UPB of all Mortgages sold.

There seems to be an appetite for these loans from investors, so this probably won’t be that big of an issue. NOO pricing seems to have found a level here. This makes sense – these loans are generally <75 LTV, and with home price appreciation in the double digits, the collateral means these loans are going to be money good.

TIAA’s correspondent lending division is being acquired by Pen Fed.

The number of loans in forbearance fell slightly to 4.16% last week, according to the MBA. “The share of loans in forbearance declined for the 14th straight week, with small drops across most investor types and all servicer types,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Forbearance exits dropped to 6 basis points, the lowest weekly level since mid-February, but new forbearance requests, at 4 basis points, matched the recent weekly low from early May.”

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