Morning Report: GDP fell in the second quarter

Vital Statistics:

S&P futures4,0241.25
Oil (WTI)99.011.85
10 year government bond yield 2.68%
30 year fixed rate mortgage 5.59%

Stocks are flat after GDP came in negative for the second consecutive quarter. Bonds and MBS are up.

The Fed hiked the Fed Funds rate 75 basis points yesterday as expected. The vote was unanimous. Jerome Powell made hawkish remarks during his press conference. The prepared remarks are here. The money quote:

My colleagues and I are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses…. From the standpoint of our Congressional mandate to promote maximum employment and price stability, the current picture is plain to see: The labor market is extremely tight, and inflation is much too high.

The September Fed Funds futures contracts are pricing in a 80% chance of a 50 basis point hike and a 20% chance of a 75 basis point hike. For the end of the year, the December futures are seeing the Fed Funds rate up either 75 or 100 basis points from here. The June 2023 futures see lower rates than December. In other words, we are probably about 75% of the way through this tightening cycle. Of course the economic effect of tightening starts to be felt in six to 9 months, so late 2022 / early 2023 will be when the impact really begins to be felt.

The advance estimate for second quarter GDP came in at -0.9%, which is the second consecutive quarter of declining GDP. GDP was negatively affected by inventory investment, government spending, and housing. Personal Consumption Expenditures were positive. The PCE Price Index rose 7.4%, the same as the first quarter. Note this is probably not going to influence the Fed much given it is older data.

As I am sure you will hear in the media and from the Administration, two consecutive quarters of negative GDP growth is not an official recession. The National Bureau of Economic Research makes the final determination, and given the strength of the labor market they have the leeway to say we aren’t in one.

Of course as the economy weakens due to the recent rate increases, the NBER might have to bow to reality and declare one. But they will probably hold off as long as they can. Note that initial jobless claims are ticking up again, hitting 256k last week. The prior week’s 251k reading was revised upward to 261k.

The GDP print and the Fed’s hawkishness is pushing the bond market up (rates down), which is creating an interesting dynamic. The yield curve inversion remains, with the 2s / 10s spread at negative 21 basis points. If the Fed raises rates another 50 basis points in September and the 10 year stays here, we will have a fully inverted yield curve. You can see below the 2s / 10s spread going back to the 1980s. It has been a decent recessionary indicator, although you could argue we are in one now.

Mr. Cooper’s earnings came in better than expectations, and the stock traded up about 5 bucks on the news. Net income came in at $151 million, which was driven primarily by servicing, although origination income was positive as well. Volume fell 33% QOQ to $7.8 billion. Mr. Cooper is valuing its servicing book at 155 basis points.

Mr. Cooper has held up better than most originators during this environment due to the relative size of its servicing book. If rates stabilize or start heading downward, that tailwind will probably weaken.

28 Responses

  1. Interesting companion piece to the idea of being able to sell a kidney


  2. There’s a lot to unpack here but the final couple of paragraphs tell the story! Not sure who can beat Trump (I suppose the new guy is DeSantis) but I really doubt Pence has a chance in hell!!!

    Pence did a great thing for the country on January 6. His tragedy is that he has managed to earn the contempt of the MAGA world and the anti-MAGA world. Again, he deserves full credit for not obeying Trump’s command to refuse to count the Electoral College votes on January 6, 2021. That took courage and a certain amount of integrity and saved the country from a constitutional crisis and possibly worse. Considering the stakes, he should have followed it up with total honesty about how we reached that frightening moment in American democracy. If he had attempted to invoke the 25th Amendment, or encouraged senators to convict Trump at the second impeachment, or testified in public to the House January 6th Committee, it might have gone some way to compensate for the infamy of the past four years.

    Pence chose another path—trying to have it both ways. It will end, perhaps appropriately, with a whimper.


    • Trump will be a convicted felon prior to November 5th, 2025.


      • that will probably backfire on the left, IMO. But I suspect establishment Rs will breathe a sigh of relief.


        • I predict the potential for actual violence from the right. And not the antifa looting and mayhem but real, honest to goodness Watts level violence.


        • McWing:

          I predict the potential for actual violence from the right.

          I think you are right. I think a Trump indictment will confirm to many on the right the existence of a deep state dual justice system in which people on the right are held to a much different standard of justice than people on the left. The disparity in treatment between the Jan 6 rioters and the 2020 BLM rioters is already too obvious to deny, as is the contrast between the treatment by the FBI, Justice department and media of the Russian Collusion hoax and the Hunter Biden corruption revelations. Not to mention the treatment of Hillary’s email situation on 2016.

          If Trump gets indicted, I expect a lot of people to decide that they are mad as hell, and aren’t going to take it any more. The people who are clamoring for his head are being incredibly short sighted. But they do live in a political and cultural bubble, so I suppose their blindness shouldn’t be that surprising.


        • I don’t think so. IMO the model is Silvio Berlusconi.

          But if the left tries to use this as their Reichstag fire then all bets are off.


      • “Trump will be a convicted felon prior to November 5th, 2025.”

        That will be interesting given that the election is held in November of 2024.


    • The lesson…progressives will never truly respect you or your good faith unless you buy into their delusional narratives 100%.


    • Pence is a competent and practical manager but I don’t see him beating Trump or Desantis in a contest.

      Pence did his job on January 6th, dismissing the idea that the vice-president could just throw out the results of the election. He did not make it his mission afterwards to crucify Trump in order to win accolades from the Staff of the Bulwark but accomplish little else.

      Still I’m not sure this is the political moment for practical managerial presidents.


      • I think the Republicans are done with gee-whiz Republicans like Mitt Romney with a “kick me” sign on their backs.

        DeSantis has all of Trump’s good points (including the ability to punch the left square in the mouth) without his obvious disadvantages.

        I suspect he gets the nom and crushes kamala

        The left had a good run from 2008 to now, but I think people are sick of their shit.


  3. No shit?


  4. Jesus, what a dumb broad.

    Lauren Boebert wants the House to pass a Rule to give her 5 days to read a Bill before voting on it.


  5. I do admit to being amused that Trump is hosting an LIV golf event at Bedminster considering the PGA dumped his course in Florida.


  6. “There’s too much fucking perspective now”

    White House economic adviser Brian Deese: “With respect to food, […] the high prices are hitting Americans very hard, but in a way that is different from some places that are facing famine, for example.”


  7. And we’re not having a famine like other places!



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