Morning Report: Awaiting the FOMC minutes

Vital Statistics:

S&P futures4,012 5.50
Oil (WTI)75.73-0.60
10 year government bond yield 3.94%
30 year fixed rate mortgage 6.64%

Stocks are flattish after yesterday’s bloodbath. Bonds and MBS are down.

The FOMC minutes will be released at 2:00 pm. We know that Mester and Bullard were considering a 50 basis point hike in February, so it will be interesting to hear if the members were more hawkish than the February press release suggested. Bullard recently said that he sees the Fed Funds rate rising to 5.375%, which presumably means that the terminal Fed Funds rate will be in a range of 5.25%- 5.5%. This comports with the June Fed Funds futures.

Despite the sturm and drang in the bond markets, the Fed Funds futures haven’t changed all that much. The March futures see a 79% chance of a 25 basis point hike and a 21% chance of a 50 basis point hike, while the December futures still see a range of 5%-5.25% as the most likely outcome.

The reversal in rates didn’t help mortgage applications last week. The MBA mortgage application index fell 13.3% as purchases fell 18% and refis fell 2%. The purchase index is 41% lower than a year ago, while the refi index is down 72%. “Mortgage rates increased across all loan types last week, with the 30-year fixed rate jumping 23 basis points to 6.62 percent – the highest rate since November 2022. The jump led to the purchase applications index decreasing 18 percent to its lowest level since 1995,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “This time of the year is typically when purchase activity ramps up, but over the past two weeks, rates have increased significantly as financial markets digest data on inflation cooling at a slower pace than expected. The increase in mortgages rates has put many homebuyers back on the sidelines once again, especially first-time homebuyers who are most sensitive to affordability challenges and the impact of higher rates.”

HUD is reducing the mortgage insurance premium for FHA loans. Supposedly the premium is falling from 115 to 85 basis points. This will help affordability issues for this Spring Selling Season, although high prices and rates will matter more.

Luxury homebuilder Toll Brothers announced earnings after the close yesterday. Earnings per share rose, while revenues were up 4%. The cancellation rate was surprisingly low at only 14%. Gross margins rose, so there is no evidence of price-cutting or promotional activity in the luxury home space.

“Since the start of the calendar year, we have seen a marked increase in demand beyond normal seasonality as buyer confidence appears to be improving. We believe the recent pick-up in demand is a sign that the long-term fundamentals underpinning the housing market remain intact. These include favorable demographic and migration trends, a very tight resale market, and growing pent-up demand resulting from over a decade of underproduction. Notwithstanding near-term uncertainty in the economy, we expect these factors will continue to support the housing market well into the future.”

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