Morning Report: Housing starts disappoint again.

Vital Statistics:

S&P futures4,036-49.25
Oil (WTI)113.981.69
10 year government bond yield 2.98%
30 year fixed rate mortgage 5.48%

Stocks are lower this morning after lousy retailer earnings. Bonds and MBS are down.

I just got back from the Secondary conference in NYC. Seemed much more sparsely attended than previous years. The talk is all about cost-cutting and getting every last basis point you can out of a loan. Non-QM was a big subject, especially the part about that market drying up a couple months ago when rates spiked. Credit spreads for NQM are in from the wides of a couple months ago, but are still nowhere near where they were at the end of last year.

Retail sales rose 0.9% in April, which was a touch below expectation. These numbers are nominal, which means inflation isn’t taken into account. Ex-vehicles they rose 0.6% and ex-vehicles and gas they increased 1%. FWIW, we have seen some poor numbers out of the retailers – Target announced earnings this morning and is down 25% compared to yesterday’s close. Margins are decreasing an costs (especially distribution costs) are up. WalMart was beaten up pretty badly yesterday as well.

Do these numbers raise concerns about consumption, which is 70% of the US economy? Not yet, is the short answer. During the COVID lockdowns, people spent more on goods and less on services. Now that the pandemic is largely behind us, that is reversing. People are taking trips and vacations instead of spending on a new TV. Note that rising gas prices are having an effect as well. Rising gas and food prices crowd out other discretionary spending. Falling consumption will help alleviate price pressures, which is something that the Fed would like to see.

Jerome Powell said that no one should doubt the Fed’s resolve to fight inflation, even if that means unemployment will increase. “Restoring price stability is an unconditional need. It is something we have to do,” Mr. Powell said in an interview Tuesday during The Wall Street Journal’s Future of Everything Festival. “There could be some pain involved.” The Fed has painted itself into a corner, as the economy is weakening and the Fed needs to tighten to bring inflation under control. In a lot of ways, this was the story of the 1970s.

Housing starts disappointed again, coming in at 1.72 million in April. This is down MOM, but up significantly year-over-year. Building Permits rose to 1.82 million, in line with expectations.

The NAHB Housing Market Index – a measure of homebuilder sentiment – fell pretty dramatically from 77 to 69. This is a two year low on the index. “The housing market is facing growing challenges,” said NAHB chief economist Robert Dietz. “Building material costs are up 19% from a year ago; in less than three months mortgage rates have surged to a 12-year high, and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family.”

The MBA revised its forecasts for 2022 and 2023. Total originations for 2022 have been lowered from $2.5 trillion to $2.6 trillion. 2023 and 2024 are expected to contract further to $2.3 trillion and $2.5 trillion respectively.

Interestingly, they think rates have peaked here. They see the 30 year fixed rate mortgage settling out at 5.2%, and then gradually declining to 5% by the end of the year and then falling to 4.8% in 2023. The 10-year Treasury is expected to find a level at 2.9%. GDP growth is expected to stay below 2% for the next couple of years. Inflation is forecasted to peak around 8%, and fall to 5.4% by the end of the year.

Needless to say, the underlying assumption here is that the Fed can stick the landing and cool off inflation without causing a recession. In other words, this is probably a best-case scenario economically. Historically, an aggressive tightening schedule has caused recessions. The difference is that we have a super-tight labor market going into a tightening cycle. On the other hand, globalization and technology have papered over a lot of monetary sins over the past 40 years and that phenomenon is largely played out.

14 Responses

  1. This bodes ill for Democrats:

    “DCCC internal poll – House Dems are getting crushed

    House Democrats may be in worse political peril than they’ve let on publicly.

    During a Thursday luncheon last week with DCCC Chair Sean Patrick Maloney, Frontline Democrats – the party’s most endangered lawmakers – were told that, in battleground districts, the generic Republican is beating the generic Democrat, 47-39, according to lawmakers, multiple party officials and the DCCC.

    This is a stunning margin and highlights the incredibly perilous position Democrats find themselves in.

    Given that Democrats generally have a three- or four-point built in advantage on the generic ballot, this is a particularly concerning development for Speaker Nancy Pelosi’s majority. An eight-point deficit on the generic ballot could be a sign of a wave for House Republicans.”


    • One thing we can say for Musk: At least he understands the modern Democratic Party:


      • I have no dispute with his characterization. While the GOP is flawed and many of the Republican candidates for many offices kind of suck, the Democrats and the progressive left have lost their mind.

        Voting a straight Republican ticket in 22. Used to vote either against the incumbent or for an eligible 3rd party or independent (or skip the midterms). Not this time.


        • I don’t understand how anyone who cares about policy and is not themselves a lunatic progressive could vote for the Dems, whether it be for the Senate, the House, or the presidency. For me the extreme radicalness of Dem policy was obvious in 2020, which is why I found “moderates” voting for Biden to be inexplicable. But with what is going on with him as president, surely even those voters can no longer be that blind, can they?


        • The moderates voting for Biden generally were, I think, mostly responding to Trump’s belligerence and hostile Tweeting. Independents were probably responding to the handling of COVID which was not confidence inspiring. And of course some were seduced by the media narrative, as honestly beyond Dem policy the fact Biden was absent from his own campaign should have been concerning. But the MSM said he was great and Trump was divisive and racist so while self-characterized moderates they were really just low-information.

          Inflation is data even low-information voters internalize.

          I think some folks saw Trump as a cause of cultural strife rather than a symptom, so thought voting for a nice old man would make that strife go away. And Biden did promise to unify. I think it should be clear to most people now that electing Biden didn’t improve strife and made everything worse besides.

          Except for hardcore leftists and Democratic partisans. For them everything going on are positives, not negatives. This IS what they voted for.

          So I think any “moderates” who haven’t been radicalized are unlikely to vote for Democrats. Same with independents. There will be cases where in purple areas the Dem candidate is just a much better political candidate than the Republican. But that’s kind of on the GOP and how good they are at Fielding candidates.

          Midterms should be a good temperature-taking of the country. Primary turnout is through the roof. Polls say different but actual elections suggest Democrats are highly motivated voters (still!) but Republicans are also highly motivated.

          So it may not be the red wave it really ought to be considering the Dems awful performance. And it has been outstandingly awful.


        • “The moderates voting for Biden generally were, I think, mostly responding to Trump’s belligerence and hostile Tweeting.”

          And the premise, which turned out to be flawed, that Biden as President would act pretty much the same as he had as a Senator.


        • A lot of which was invisible. He wasn’t exactly the greatest senator or VP, but in both roles he wasn’t super-visible. I think some of this was predictable to those who paid very close attention to him, but most people don’t pay that close attention to senators and VPs unless the media forces you to.


      • Re: Musk – not sure why he would go public with this. Seems counterproductive to his current goals.

        Edit: Unless he’s going to get into politics and actually run for President. But I don’t think he can as he’s originally from South Africa.


        • He can’t run for president. But he can run for governor or senator, as I recall. Or it might just be his personality. And demonstrating you can do it and survive?


        • Demonstrating you can do it and survive: I suspect Musk may know a few more really rich people who are scared of the Democrats and the woke mob and so virtue signal or take the corward’s way out, and he’s decided to be an example of what it is to fight. Just a thought.


        • I think it’s because he has Fuck You money.


        • Musk is a loose cannon. Always has been


        • Brent:

          Musk is a loose cannon.

          I think you are right. I like what he is doing/saying right now, but I could easily see him doing/saying insane things.


    • In normal times the party that holds the Whitehouse loses seats. And the Democratic Party has not endeared itself to centrists and independents. They used to govern much the same but did not always say the quiet part out loud so much.


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