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.

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