All Things in Moderation

Vital Statistics:

Stocks are higher this morning as war continues in Ukraine. Bonds and MBS are down. Even though the 10-year Treasury yield dropped about 10 bps yesterday, mortgage rates fell about a basis point. I think mortgage rates will go only grudgingly lower if the 10 year rallies. The Fed is about to wrap up its purchases of MBS in March, so that tailwind is just about gone.

The markets are surprisingly sanguine about the whole Russia / Ukraine situation. I guess the markets are viewing the economic fallout from this as contained. Here is one thing to keep an eye on: If one of the sanctions is to boot Russia from SWIFT, the International Banking infrastructure, then pretty much any Russian debt is going to be unpaid, and therefore worthless.

Old times might remember a hedge fund called Long Term Capital Management, which blew up after Russia defaulted on its sovereign debt in the late 90s. Most of the exposure seems to be in European banks, although Citi supposedly has some too.

Personal Incomes were flat in January, according to the Bureau of Economic Analysis. Personal spending rose 2.1%. The Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation, rose 0.6% MOM and 6.1% YOY. The core index, which excludes food and energy rose 0.5% MOM and 5.2% YOY.

Rocket reported fourth quarter numbers. Volume fell 29% compared to the fourth quarter of 2020, and gain on sale contracted from 4.41% to 2.8%. The combination of lower volumes and lower margins contributed to a 71% reduction in earnings per share. For the first quarter Rocket is forecasting volumes to fall to 52-57 billion however gain on sale is expected to increase slightly to a range of 2.8% to 3.1%.

Consumer sentiment improved marginally in the second half of February, however it remains at the lowest level in a decade, according to the University of Michigan Consumer Sentiment Survey. To put that into perspective, 2012 was when the US residential real estate market finally bottomed out. This means consumers are in a pretty foul mood. Note this is before the Russian invasion of Ukraine which probably isn’t going to help things.

From the release: “The February descent resulted from inflationary declines in personal finances, a near universal awareness of rising interest rates, falling confidence in the government’s economic policies, and the most negative long term prospects for the economy in the past decade”

Below is the chart for economic expectations:

Pending home sales fell 5.7% in January, according to NAR. “With inventory at an all-time low, buyers are still having a difficult time finding a home,” said Lawrence Yun, NAR’s chief economist. Given the situation in the market – mortgages, home costs and inventory – it would not be surprising to see a retreat in housing demand.”

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