Morning Report: Despite rising rates, there are still 11 million refis out there

Vital Statistics:

 LastChange
S&P futures4,611-47.2
Oil (WTI)84.871.03
10 year government bond yield 1.84%
30 year fixed rate mortgage 3.67%

Stocks are lower this morning on fears of inflation and aggressive Fed countermeasures. Bonds and MBS are down.

We won’t have much market-moving data this week, however we will get bunch of housing data with the NAHB Housing Market Index, housing starts, and existing home sales. Earnings season is underway, with a slew of bank earnings this week.

Rising rates have cut the number of high quality refinance candidates to just 7.1 million, the lowest since November 2019. “The latest numbers from Freddie have cut the number of high-quality refinance candidates to just 7.1 million – down from about 11 million at the end of December, and from as high as nearly 20 million earlier in 2020,” Black Knight said. “The last time the population was this small was back at the start of November in 2019, when rates were around 3.75%.”

Black Knight is counting high quality candidates as those with <80 LTV, >720 FICO, and current rates 0.75% above current interest rates. If you relax the LTV and FICO constraints, the number increases to 12 million. Despite these numbers, anyone who has a lot of credit card debt should take a look at a cash-out debt consolidation refi.

Bidding wars are cooling off, however they are still elevated compared to a year ago, according to Redfin. 60% of homes received multiple offers, which was down from 75% in April but up from 54% a year ago. “Buyers should anticipate that they may not win a house until their sixth or seventh bid. If you’re the type of person who falls in love with a house, this is not your market,” said Candace Evans, a Redfin team manager in New York. “If you show a house to 10 buyers, you’ll probably get eight offers. An agent on my team just put a home in the Bronx on the market and started receiving offers even though there hadn’t been a single open house or tour yet. The house ultimately received over 10 offers and went for well above the asking price.”

Given the abject lack of new construction, expect this to continue. Note that lumber is back up near the tops of last summer.

Morning Report: Earnings season kicks off

Vital Statistics:

 LastChange
S&P futures4,609-42.2
Oil (WTI)82.420.23
10 year government bond yield 1.71%
30 year fixed rate mortgage 3.61%

Stocks are lower this morning as earnings season kicks off. Bonds and MBS are up small.

Retail Sales fell 1.9% MOM in December, according to the Census Bureau. Sales were up big compared to a year ago. For the full year, retail sales were up 19.3% compared to 2020. Gas stations and food / drinking places were big drivers of the annual increases.

Industrial Production fell 0.1% MOM in December, while manufacturing production fell 0.3%. These numbers came in well below expectations. Capacity Utilization slipped to 76.5%.

Bank earnings are rolling in. JP Morgan reported record annual earnings, however Q4 numbers were down compared to a year ago. Mortgage originations increased 30% YOY, and were up compared to Q3. Net income was bolstered by investment banking revenue as well as reserve releases. The stock is down a few percent pre-open.

Wells Fargo reported quarterly earnings more than doubled compared to the 4th quarter of 2020. Home lending earnings fell 8% QOQ and YOY, driven by lower volumes and lower gain on sale margins. Volumes were down 11% YOY. The stock is up about a percent this morning.

Lael Brainard signaled a March rate hike in her testimony in front of Congress yesterday. The Fed “has projected several rate hikes over the course of the year. We will be in a position to do that … as soon as our purchases are terminated.” The Fed should be done with its QE adjustments in March, so presumably this means a March hike is on the table.

Consumer sentiment is slipping, according to the University of Michigan Consumer Sentiment Survey. Inflation is a big driver:

When asked to assess their finances, 33% reported being worse off financially than a year earlier, just above the April 2020 shutdown low of 32%, the worst reading since 2014. Twice as many households with incomes in the bottom third as in the top third reported worsening finances (40% vs. 20%). Inflationary erosion of living standards was the main explanation offered by these consumers. The importance of inflation in determining their future financial prospects was dominated by how consumers judged their future inflation-adjusted incomes (see the chart). Nearly half of all consumers (48%) anticipated that the inflation rate would outdistance income increases to produce real income declines. Just 17% anticipated real income gains in 2022.

Morning Report: Wholesale inflation running at 10%.

Vital Statistics:

 LastChange
S&P futures4,72812.2
Oil (WTI)82.42-0.23
10 year government bond yield 1.73%
30 year fixed rate mortgage 3.59%

Stocks are higher this morning despite more hawkish comments out of Federal Reserve officials. Bonds and MBS are up.

Inflation at the wholesale level rose 0.2% MOM and 9.7% YOY, according to the Producer Price Index. Petroleum products accounted for about a quarter of the increase. Ex-food and energy, the index rose 0.5% MOM and 8.3% YOY.

Initial Jobless claims ticked up last week to 230k.

Guaranteed Rate is shutting down Stearns Lending’s wholesale channel. This is just a year after it acquired the business from Blackstone. “Guaranteed Rate will continue to thrive and win market share by having a laser focus on leveraging our industry-leading purchase platform augmented by the best loan officers in the business,” Guaranteed Rate CEO Victor Ciardelli wrote.

Redfin purchased Bay Equity Home Loans for $135 million to build up its mortgage operations. Redfin paid 2.2x tangible book value per share, which is a pretty hefty premium to where mortgage originators are currently trading in the market. As volumes begin to shrink we should see more M&A activity in the mortgage banking space.

Foreclosure inventory fell to to an all-time low in 2021, according to data from ATTOM. Of course the COVID foreclosure prevention rules put in place by the government is driving it, however home price appreciation and wage inflation will probably work to keep down foreclosures. Given how long it takes for foreclosures to work through the system, we probably will see depressed levels for this year before returning to normal.

Inflation is going to be here a while, according to a survey of corporate executives. “Inflation is here,” Honeywell International Inc. Chief Executive Officer Darius Adamczyk said in an interview. “We have to be very, very careful how it gets solved, too, because it’s a little bit like driving your vehicle. If you slam on the brakes too hard, we could see the other side of inflation, which is a recession.”

Morning Report: Inflation is the highest in 40 years

Vital Statistics:

 LastChange
S&P futures4,7149.2
Oil (WTI)82.11.23
10 year government bond yield 1.74%
30 year fixed rate mortgage 3.64%

Stocks are higher this morning on overseas strength. Bonds and MBS are flat.

Inflation at the consumer level hit the highest since the song 876-5309 topped the charts in 1982. The headline consumer price index rose 0.5% MOM and 7.0% YOY. Ex-food and energy prices were up 0.6% MOM and 5.5% YOY. Shelter and used cars were big drivers (pardon the pun) of the increase. The torrid home price appreciation of last year will start to filter into the numbers this year, as it takes about 12-18 months for it to show up into owners’ equivalent rent. Suffice it to say, elevated CPI numbers are going to be with us for a while, even if we see some relief in food and energy prices.

Mortgage applications rose 1.4% last week as purchases rose 2% and refis rose 0.1%. “Mortgage rates increased significantly across all loan types last week as the Federal Reserve’s signaling of tighter policy ahead pushed U.S. Treasury yields higher,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates at these levels are quickly closing the door on refinance opportunities for many borrowers. Although refinance activity changed little over the week, applications remained at their lowest level in over a month, and conventional refinance applications were at their lowest level since January 2020.”

Purchase activity should perk up soon as the spring selling season is just around the corner.

In his testimony in front of the Senate yesterday, Jerome Powell said that the economy no longer needed “aggressive stimulus” and went further to say that high inflation is a “severe threat” to the economy. “It is really time for us to begin to move away from those emergency pandemic settings to a more normal level,” Mr. Powell said. “It’s a long road to normal from where we are.”

Morning Report: Inflation is weighing on small business

Vital Statistics:

 LastChange
S&P futures4,663-1.2
Oil (WTI)79.51.23
10 year government bond yield 1.77%
30 year fixed rate mortgage 3.66%

Stocks are flattish this morning as we await Jerome Powell’s testimony in front of the Senate Banking Committee. Bonds and MBS are down again.

Small business optimism ticked up in December, according to the NFIB Small Business Optimism Index. Inflation remains a problem, with a net 22% of respondents saying it was their biggest headache. A net 57% reported raising prices. Small business owners are glum about the outlook as well, with a net negative 35% of respondents seeing worse conditions ahead. A net 49% also announced they have job openings they could not fill. In addition, a net 48% reported raising compensation, which is a record for the index, which goes back almost 50 years.

Mortgage Credit Availability rose by 0.8% in November, the fifth increase in the past six months. “Credit supply increased in December, with growth across both conventional and government segments of the market,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “December’s growth was driven by more ARM and lower credit score loan programs, which was likely due to a combination of the rising rate environment and affordability challenges. Lenders expanded offerings to qualified borrowers who were the most impacted by these market conditions. Additionally, there was an increase in government streamline refinance programs to aid borrowers still looking to refinance before rates rise further.”

That said, credit is still extremely tight historically. Take a look at the chart below. We are closer to bust levels than pre-pandemic levels. I have to imagine this will get worse as the FHFA increases fees for second homes and high balance loans.

The Fannie Mae Home Purchase Sentiment Index decreased in December as home prices and interest rates rise. “The HPSI’s underlying components changed dramatically in the last 12 months – particularly the two related to homebuying and home-selling sentiment – and we have seen the index drift slightly downward since March 2021, an indication that the housing market may begin to soften in the coming year,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “Over the past year, low mortgage rates plus government stimulus programs helped increase mortgage demand, but the bidding-up of homes increased prices to record levels, making affordability a greater constraint for both first-time and move-up homebuyers. Among homeowners, the ‘good time to buy’ sentiment fell 30 percentage points over the past year to its current level of 30%; for renters it fell from 37% to 21%. Even though demand remains strong, a majority of consumers clearly have reservations about purchasing a home at current prices.”

Morning Report: Goldman sees 4 rate hikes this year

Vital Statistics:

 LastChange
S&P futures4,637-30.2
Oil (WTI)78.65-0.23
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.57%

Stocks are lower this morning as investors fret about rising rates. Bonds and MBS are down.

The upcoming week will be dominated by inflation data, with the Consumer Price Index on Wednesday and the Producer Price Index on Thursday. The street is looking for 0.4% MOM / 7.1% YOY for the headline CPI and 0.5% MOM and 5.4% for the CPI ex-food and energy.

Goldman is out with a call this morning calling for 4 rate hikes in 2022. The Fed Funds futures agree. “Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks,” Hatzius wrote. “We continue to see hikes in March, June, and September, and have now added a hike in December for a total of four in 2022.”

The central tendency is now for 4 rate hikes, although it is more or less a toss-up between 3 and 4.

Goldman also sees the central bank beginning the process of shrinking its balance sheet in July. It will probably do this by only reinvesting a portion of maturing assets back into the market. In other words, if $1 billion of MBS and Treasuries mature in a particular month, the Fed might buy $500 million and let the other $500 million “retire.”

Morning Report: Payrolls disappoint

Vital Statistics:

 LastChange
S&P futures4,6841.2
Oil (WTI)79.450.11
10 year government bond yield 1.75%
30 year fixed rate mortgage 3.47%

Stocks are flattish after a disappointing payroll number. Bonds and MBS are down small. Global bond yields are rising as well, with the German Bund at nearly a 3-year high and threatening to crawl out of negative territory.

The jobs report was a bit of a mixed, bag, with payrolls coming in below 200k, which was about half of the expected number, and way lower than the 800k reported by ADP. On the bright side, the unemployment rate fell to 3.9%.

The labor force participation rate was steady at 61.9% and the employment-population ratio ticked up 0.2% to 59.5%. Average hourly earnings were up 4.7% YOY. So overall the internals of the report were good. The labor market is doing well, albeit we have fewer employed than before the pandemic.

The FOMC minutes touched on what might be going on – a lot of job losses are probably from early retirements. COVID’s mortality rate is a function of age, and perhaps many people in their early 60s decided to stop working instead of taking the risk of getting sick at the workplace.

The market is still digesting the FOMC minutes and the fact that the Fed is going to be a lot more hawkish. The change in sentiment is most evident in the March Fed Funds Futures, which are now predicting a 70% chance of a 25 basis point hike at the March meeting. A week ago, the market was predicting a a tossup, so this is a big shift.

Morning Report: Hawkish FOMC minutes

Vital Statistics:

 LastChange
S&P futures4,6931.2
Oil (WTI)80.092.11
10 year government bond yield 1.73%
30 year fixed rate mortgage 3.47%

Stocks are flattish this morning as global bond yields rise. Bonds and MBS are down.

The FOMC minutes were taken as bearish for bonds, and yields started creeping up after the release. It isn’t just the US – German, British and Japanese yields are up big as well. Here is the discussion of inflation:

Participants remarked that inflation readings had been higher and were more persistent and widespread than previously anticipated. Some participants noted that trimmed mean measures of inflation had reached decade-high levels and that the percentage of product categories with substantial price increases continued to climb. While participants generally continued to anticipate that inflation would decline significantly over the course of 2022 as supply constraints eased, almost all stated that they had revised up their forecasts of inflation for 2022 notably, and many did so for 2023 as well. In discussing their revisions to the inflation outlook, participants pointed to rising housing costs and rents, more widespread wage growth driven by labor shortages, and more prolonged global supply-side frictions, which could be exacerbated by the emergence of the Omicron variant. Moreover, participants widely cited business

contacts feeling confident that they would be able to pass on higher costs of labor and material to customers. Participants noted their continuing attention to the public’s concern about the sizable increase in the cost of living that had taken place this year and the associated burden on U.S. households, particularly those who had limited scope to pay higher prices for essential goods and services.

The FOMC also touched on an important point – that some of the factors that worked against inflation in the past – notably technology, globalization and productivity growth – might be diminishing. Currently wage growth is high while productivity is low. The Fed is especially worried that annual cost-of-living increases will begin to become a permanent part of the labor landscape, which will pull inflation above its 2% target.

The Fed also discussed balance sheet normalization. It is clear that they think the balance sheet is bigger than it should be, and they would like to wind it down at some point. They prefer to use the Fed Funds rate to manage the economy, given that they have more certainty about how it will work. In addition, their preference is to get rid of mortgage backed securities first. This is going to be a longer-term issue as they will probably first re-invest maturing proceeds to maintain the level of holdings, and then start to let them run off.

The FHFA announced new LLPAs for high balance and second homes yesterday. Upfront fees for high balance loans will increase between 0.25% and 0.75%, although first-time homebuyers with incomes at or below the area median income will have the fees waived. For second homes, the fees will be a function of LTV ratios, going from 1.125% to 3.875%. I have to imagine they are going to do something for investment property loans as well. On the bright side, this is a better approach than their previous attempt, which involved caps at the lender level.

We had some employment-related indicators this morning, which initial jobless claims back to pre-pandemic levels at 207,000. The Challenger and Gray job cut report showed 19,052 job cuts last month.

The ISM Services Index decelerated in December from its all-time high in November. Supply chain issues continue to be mentioned as a major constraint, along with rising prices and labor costs / supply.

Morning Report: The leading inflation dove becomes more hawkish

Vital Statistics:

 LastChange
S&P futures4,780-3.2
Oil (WTI)77.690.71
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.42%

Stocks are flattish this morning as we await the FOMC minutes this afternoon. Bonds and MBS are up small.

Mortgage applications fell 2.7% over the holiday week as purchases fell 4% and refis fell 2%. “Mortgage rates continued to creep higher over the past two weeks, as markets maintained an optimistic view of the economy,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance demand continues to dwindle, as many borrowers refinanced in 2020, and in early 2021 – when mortgage rates were around 40 basis points lower. The purchase market also finished the year on a slower note, with the final week coming in at the weakest since October 2021. Even though average loan sizes were lower, home price appreciation remains at very high levels.”

The ADP Employment report showed that 807,000 jobs were added in December. “December’s job market strengthened as the fallout from the Delta variant faded and Omicron’s impact had yet to be seen,” said Nela Richardson, chief economist, ADP. “Job gains were broad-based, as goods producers added the strongest reading of the year, while service providers dominated growth. December’s job growth brought the fourth quarter average to 625,000, surpassing the 514,000 average for the year. While job gains eclipsed 6 million in 2021, private sector payrolls are still nearly 4 million jobs short of pre-COVID-19 levels.” Note that the expectation for Friday’s jobs report is 400k, so there may be some upside there.

One of the leading dovish voices at the Fed, Neel Kashkari backs two rate hikes in 2022. He discusses the two “opposing forces” that the Fed needs to balance going forward – the first, that inflationary expectations become built into the economy, and the second, that the economy returns to the slow-growth / low inflation state that has described the past 20 years.

He has a point in that the economy is basically being force-fed adrenaline with trillions worth of fiscal stimulus, and highly negative inflation-adjusted interest rates. Growth, at least according to the GDP numbers is ok, however it should be rip-roaring given this unprecedented amount of stimulus. Economists are well aware that stimulus has diminishing returns – they call it pushing on a string – and we may well be at this point. Which means that when the sugar high dissipates the economy returns to mediocre growth, albeit with higher inflation.

As of now, the market consensus is that we will see a total of 75 basis points in rate hikes next year:

Morning Report: Supply chain issues easing?

Vital Statistics:

 LastChange
S&P futures4,80217.2
Oil (WTI)76.990.91
10 year government bond yield 1.68%
30 year fixed rate mortgage 3.41%

Stocks are higher this morning despite the backup in rates. Bonds and MBS are down.

Is inflation beginning to moderate? According to the latest ISM Manufacturing Index, prices paid fell from a net 84.2% to 68.2%. This is a survey-driven number, so accept it for what it is however this is at least the first indication that supply chain issues are beginning to ease up. Demand is still strong, which is a good sign, and employment rose as well.

Job openings decreased to 10.6 million in November, according to the JOLTS jobs report. Most of the decrease was in the leisure and hospitality sector. The quits rate increased to 3%, which matched the series high set last September. The quits rate is a good predictor of future wage inflation.

The Fed is looking at balance sheet reduction as another way to combat rising inflation. Prior to the pandemic, the Fed tried to reduce its holdings of Treasuries and mortgage backed securities, however it found that the economy was too weak to withstand it. Inflation was running below the Fed’s 2% target, and the central bank was worried about the economy slipping into disinflation, if not outright deflation.

The situation today is much different. Inflation is running above the Fed’s target, and the labor market is much stronger. In mid-December, Jerome Powell said:  “This is just a different situation, and those differences should inform the decisions we make about the balance sheet at this time.”

Strategists are lobbing in their forecasts for rates next year. Bankrate sees the 30 year mortgage rate hitting 3.75% next year before falling to 3.5%. The MBA sees the 30 year fixed rate hitting 4%. Everyone agrees that 2022 will be a purchase-driven market as rate / term refi activity dries up.

Home price appreciation hit 18.1% in November, according to CoreLogic. Lower-priced homes are seeing the fastest appreciation. Arizona, Florida and Idaho all experience 25%+ growth. Separately, affordability has fallen below historical average, according to ATTOM. Home ownership costs on the typical home constituted 25.2% of the average wage in the fourth quarter, up from 24.4% in Q3 and 24.1% last year. That said, the labor market is tight and wages are rising.

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