All Things in Moderation

Vital Statistics:

Stocks are lower this morning as we begin an important week for data. Bonds and MBS are up.

Ordinarily, the week after the jobs report is data-light. This week that is not the case. This week kicks off earnings season, with a lot of the big banks reporting. Second, we will get the Consumer Price Index on Wednesday, which is now one of the most important economic reports out there. Finally, we will have the University of Michigan Consumer Sentiment Survey. Historically, these consumer sentiment surveys have generally been non-events as far as markets go, but the Fed is focusing on the inflationary expectations embedded in the report. In fact, that report loomed large in the Fed’s decision to move from 50 basis points to 75.

The stock market is down pretty big from its heights of earlier this year. Do we bottom here? IMO the stock market’s behavior is the classic bear market before a recession playbook. Going forward, earnings season will matter a lot. While I don’t generally talk too much about currencies (they generally aren’t relevant to mortgage banking) the US dollar has been quite strong this year.

This is factoring into earnings for companies with big overseas operations. As a general rule, as the dollar rises, corporate earnings fall. So this increase in USD will be a big factor this earnings season. Microsoft has already warned that the US dollar will take a bite out of profits. Chip shortages and currencies will definitely affect the automakers. The fear in stock market investors is that earnings estimates are still too high and need to drop further.

The profit outlook for banks will be dented by mortgage banking. Wells indicated at a conference that Q2 mortgage banking profits will be down about 50% from Q1. Companies are aggressively cutting staff, and it looks like there probably will be more to come: “Over the next month or two we’ll see the bulk of layoffs,” said Doug Duncan, chief economist at Fannie Mae, which, along with Freddie Mac, backs many U.S. mortgages. “There is usually about a six-month lag between a turn in the market and layoffs.” While Wells and JPM are struggling in mortgage banking, apparently Bank of America has not cut staff. They saw mortgage banking revenue increase in Q1, unlike most of their compatriots.

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