Morning Report: Q1 GDP revised downward

Vital Statistics:

S&P futures3,8324.75
Oil (WTI)113.211.14
10 year government bond yield 3.17%
30 year fixed rate mortgage 5.93%

Stocks are flattish this morning after yesterday’s tech rout. Bonds and MBS are flat.

The final revision of first quarter GDP came in at -1.6%, a downward revision from the previous -1.5%. The PCE Price Index (basically inflation) was revised upward to 7.1%. Ex-food and energy it rose 5.2%. Consumption was revised downward to 1.8% from 3.1%.

The latest GDP Now estimate from the Atlanta Fed has growth increasing at 0.3% in the second quarter. If that is how it plays out, we will have managed to avoid a technical recession, however growth is anemic and the recent increases in the Fed Funds rate won’t begin to impact the economy until later this year.

Mortgage applications rose 0.7% last week as purchases rose 0.1% and refis increased 2%. The numbers were affected by the Juneteenth holiday.

“Mortgage rates continue to experience large swings,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. He noted the 30-year fixed rate declined 14 basis points last week to 5.84 percent after increasing 65 basis points during the past three weeks. Rates are still significantly higher than they were a year ago, when the 30-year fixed rate was at 3.2 percent.

“The decline in mortgage rates led to a slight increase in refinancing, driven by an uptick in conventional loans,” Kan said. “However, refinances are still 80 percent lower than a year ago and more than 60 percent below the historical average. Overall purchase activity has weakened in recent months due to the quick jump in mortgage rates, high home prices, and growing economic uncertainty.”

The abrupt shutdown of First Guaranty has left a lot of lenders with uncertain pipelines. The company laid off almost 80% of its staff on Friday, and basically left a skeleton crew to wind things down. “FGMC has experienced significant operating losses and cash flow challenges due to unforeseen historical adverse market conditions for the mortgage lending industry, including unanticipated market volatility,” Cassie Vacante, senior vice-president of Human Resources, wrote in a WARN notice.

I have heard rumors that liquidity is beginning to dry up in the non-QM space. I have to imagine the fallout from FGMC is related to it. Last week there were rumors that FGMC was hit by margin calls, which might be indicative of weakening buy-side demand for private label securities. While these are rumors only, it seems to fit.

Home Prices rose 21% in May, according to the Clear Capital Home Data Index. In the Southern region, prices rose 23%, led by a slew of Florida locations. The Northeast is beginning to experience home price appreciation at long last. Note this index is a month ahead of the FHFA and Case Shiller indices so it reflects more recent data. The rise in mortgage rates has yet to affect home price appreciation.

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