Morning Report: Big week ahead

Vital Statistics:

 LastChange
S&P futures3,97814.25
Oil (WTI)96.311.65
10 year government bond yield 2.83%
30 year fixed rate mortgage 5.60%

Stocks are higher this morning as we head into a big week of tech earnings. Bonds and MBS are down as we enter Fed week.

This week is packed with economic data, and the Fed will announce its decision on Wednesday. Aside from the Fed decision, we will get some important data including the first estimate of second quarter GDP, the employment cost index, personal incomes / outlays and house price data. We also get earnings from market heavyweights such as Apple and Amazon.

The Chicago Fed National Activity Index (sort of a meta-index of various economic indicators) was flat in June compared to a downward-revised May. Production and incomes were growing below trend, while the labor force and orders are above trend. Overall, the economy is growing below trend, which means the actions taken by the Fed are beginning to have an effect. One of the The CFNAI was flashing inflationary signs a few months ago, however we are back to normal.

There seems to be a growing consensus that inflation and interest rates have peaked for the year. While the Fed Funds rate is the most visible indicator of Fed tightening, two other levers are acting as well – quantitative tightening (or the reduction of asset purchases) and the stronger dollar. Quantitative tightening has more or less taken the wind out of the sails for the housing market and the dollar is helping on the commodity front. Supply chain issues remain a problem.

The Fed Funds futures are becoming more dovish, with the market now firmly handicapping a 75 basis point increase this month, and then another 100 basis points over the rest of the year. If you look at the far-out futures (basically summer of 2023), the Fed funds forecast is looking lower. In other words, the market thinks the Fed will be cutting rates in 2023.

You can hear the change in sentiment from Wall Street strategists as well. The emerging consensus is that the peak for rates and inflation happened in June, and inflation is beginning to subside as gas prices fall. Note the Philly Fed manufacturing index from last week showed inflation beginning to subside as well, as both the “prices paid” and “prices received” sub-indices fell substantially.

Housing Wire has a good piece on the pain in the non-QM market. Non-QM loans are mortgages which can’t be guaranteed by the government or Fannie / Freddie. These loans have been beaten up in the market due to the rapid rise in interest rates and the inability for dealers to hedge interest rate risk.

When FGMC shut its doors, it had about $418 million in loans on its warehouse lines, with Customers Bank, Flagstar, JVB and Texas Capital having the exposure. Many of these non-QM loans have low coupons and are now trading at “scratch and dent” prices.

John Toohig, a trader with Raymond James said: [There’s] a lot of underwater coupons due to rapidly rising rates,” Toohig said. “The problem with non-QM is that most banks won’t be the liquidity source for those loans in whole-loan form [purchasing] vs. the aggregators putting them into RMBS [private label securitization deals] — which doesn’t work right now [either]. “So, I wouldn’t be surprised that there is some pain coming at the warehouse-line level [revolving lines of credit used to fund mortgage originations] as loans start to age. The good news for prime jumbo [is] banks want to own those loans and balance-sheet them. The same cannot necessarily be said for non-QM.” 

Note that the National Financial Conditions Index seems to be reversing, which is good for riskier assets. Some junk spreads are tightening as well. This is part of what is driving the improving sentiment.

24 Responses

  1. The Covid liturgy,

    “This morning I tested positive for COVID-19. I am fully vaccinated and boosted and am experiencing mild symptoms,” Manchin tweeted.

    https://redstate.com/carcand/2022/07/25/sen-joe-manchin-tests-positive-for-covid-19-n601159

    Like

  2. Embracing failure:

    “In regards to homework, what they are saying, in effect, is that the idea of responsibility itself — requiring students to be accountable for completing assignments — exacerbates inequality. And that rather than trying to run everyone through a hierarchical educational system in the hopes that they will end up in the same place, it appears as if the authors would rather de-emphasize anything that reinforces the idea that one student is better than another.”

    Like

  3. LOL, I know you guys are probably sick of me posting but as long as I’m still here, I might as well try to balance things out! I do actually try to read some of your posts that show a counter narrative to mine but most of the time it just doesn’t sink in!

    The news this summer is well suited to make us feel unsettled, disrupted, and anxious about our country: The January 6th Committee hearings are revealing just how close our democracy came to being fatally wounded by the previous president. The Supreme Court’s decision to overturn Roe after half a century during which abortion was understood to be constitutionally protected has directly resulted in disturbing medical stories in several states. Mass shootings in Buffalo and Uvalde and Highland Park, gas that shot up to $5 a gallon, midterm primary elections with no shortage of anti-democracy candidates, parents arguing about when (or if) their children should learn about race and gender and sex—the list goes on and on.

    These stories are not just indicators of policy failures, or of a ratcheting up of social tensions out of political expedience, or of threats to our democracy. They also hint at something more insidious: the possibility that our story is breaking—that we have lost the thread on our shared American narrative, and an unraveling is underway.

    And I just know instinctively that this will freak all of you out……………..sorry, not sorry!

    Writing in 1967, sociologist Robert Bellah considered the United States to have faced three times of trial. The first trial was concerned with our independence and whether a democratic nation could be wrought from a British monarchy. The second trial was about slavery and the question of an inclusive liberal democracy in a diverse nation. The third and current trial, which Bellah considered to have overtaken the unaddressed elements of the second, is whether the United States can be a beacon of liberal democracy in a revolutionary and backsliding world.

    It remains to be seen if we are the people who can pass this third trial. We are in the throes of it. Midterm elections this fall, Supreme Court decisions next year, responses to the inevitable peaceful protests and acts of civil disobedience, the incidence of mass violence, and the legitimacy of democratic institutions and processes will signal to which side the scale tilts once we are through this period of disruption.

    The outcome is uncertain; we cannot blithely assume that the emergence of a stronger creedal America is inevitable. Success will hinge on our ability to resist revanchist ethnonationalist and exclusionary narratives and to embrace a civic identity dedicated to an equality that respects our racial, ethnic, religious, regional, and ideological differences. We, in our own day, are testing whether a nation so dedicated can long endure.

    https://www.thebulwark.com/is-the-american-myth-unraveling/?utm_source=substack&utm_medium=email

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    • parents arguing about when (or if) their children should learn about race and gender and sex—the list goes on and on.

      see, stuff like this is why I pretty much dismiss anything the left says. Nobody is arguing that schools shouldn’t teach about womens’ suffrage, the civil rights movement or slavery.

      That line alone is so dishonest that i can safely dismiss whoever wrote this as just another Party tool.

      and as far as freaking out about the last part, i dismiss it as boilerplate leftist catastrophizing.

      the bottom line is that the left believes dissent and protest is a privilege only they are entitled to. so i don’t really take their arguments seriously.

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      • Brent:

        That line alone is so dishonest that i can safely dismiss whoever wrote this as just another Party tool.

        Bingo. I mean, seriously…how can anyone actually believe this tripe?

        And holding up the demise of Roe as a troubling portent for “liberal democracy”… cluelessness of an absolutely staggering level.

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        • whenever the left bleats about “our democracy” you can safely substitute “the fortunes of the democrat party”

          and that is why they are so sensitive and hysterical about it. because the democrats have jumped the shark.

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        • It seems so—that the Dem’s have jumped the shark. I hope so. I don’t hold out much hope for the Republicans either in Congress or the Whitehouse when they win those things (soon, I’m thinking) but right now I’d take Bill Clinton and those 3rd way Democrats over what we got now.

          Well, anyway. Here’s hoping!

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      • “Nobody is arguing that schools shouldn’t teach about womens’ suffrage, the civil rights movement or slavery. ”

        The fight I believe is over introducing gender queer ideology in kindergarten.

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        • Also CRT. Homework assignments where white kids in 3rd grade have to write an essay on how they’ve benefitted from white privilege. And other forms of racial essentialism that’s made it’s way into the classroom.

          Like

    • “LOL, I know you guys are probably sick of me posting”

      No, not at all. I can speak for everyone but I’m very glad your posting here right now. The whole idea of this place was originally a forum for those who disagree to disagree agreeably. Clearly we struggle sometimes with the “disagreeing agreeably” part.

      But your ongoing participation is a benefit, IMO. In other words: post away. There will be disagreement, for sure, but there was a time when that was expected and okay: people had different opinions and could still debate them and be friends!

      I know, crazy right?

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    • My previous statement said, I will commence to disagreeing! 😂

      “The January 6th Committee hearings are revealing just how close our democracy came to being fatally wounded by the previous president.”

      I just don’t see how anyone can objectively conclude this. Fatally wounded? Irrespective of how bad Trump’s behavior was, January 6th was not ever going to change the outcome of the election or end with a successful coup! And there have been no details that make a dispassionate view of the facts lead to a conclusion we were “about to lose our democracy”.

      Also, this is the *identical* language of the “the election was stolen side”. This is basically the same sort of thinking—which should be surprising, given how often those in high-dudgeon over Trump’s refusal to concede his loss have called Republican presidents illegitimate (including Trump, from the moment of his election, but also Dubya) and claimed that Republicans have stolen elections (2000 and 2004 being recent examples presidentially, Stacy Abrams even more recently in Georgia, and of course Trump).

      While the apocalyptic language leading up to 2020 on the left and leading up to January 6th on the right is definitely not productive, it’s a problem that infects both sides. And the January 6th Committee is, IMO, as much a symptom of it as January 6th was.

      “ that we have lost the thread on our shared American narrative, and an unraveling is underway.”

      Or it’s evidence we share all the wrong things, and that’s the source of the unraveling, not the fact that one side doesn’t obediently surrender to every thing the other side wants without complaint.

      “And I just know instinctively that this will freak all of you out”

      I literally read and hear this kind of stuff frequently, if not constantly. It is the theme of the MSM. What would any of us be freaked out about from hearing what I hear any morning I turn on NPR in the car?

      “Success will hinge on our ability to resist revanchist ethnonationalist and exclusionary narratives”

      I find it ironic that someone in the midst of an exclusionary for the ideological viewpoint that is entirely about excluding half the country based on wrong-think is warning about “exclusionary narratives”.

      That said I’m pretty sure if you pay close attention to politics it always seems like the apocalypse is nigh. And hopefully it will remain near without ever in fact arriving. Though I’m not sure the hyperbolic warnings are actually helpful there.

      Like

    • “I know you guys are probably sick of me posting”

      Not at all. However, I hope you understand that when I disagree with you it’s not meant as a personal attack. I believe that probably applies to everyone here as well.

      Like

    • “They also hint at something more insidious: the possibility that our story is breaking—that we have lost the thread on our shared American narrative, and an unraveling is underway.”

      I am somewhat tired of this conceit that when things don’t go a certain way on a particular issue, it’s a sign that the country is falling apart.

      I’m sure a lot of people felt the same way during the 60’s and the 70’s when these things went the other way.

      To me, if you want a better example of how “we have lost the thread on our shared American narrative”, look at all the people rejecting the actual founding principles of the country and viewing it as irredeemably racist.

      Like

  4. Your terms are acceptable.

    Like

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