Morning Report: Inflation and GDP revised upwards

Vital Statistics:

 LastChange
S&P futures4,02323.50
Oil (WTI)74.93 0.98
10 year government bond yield 3.97%
30 year fixed rate mortgage 6.64%

Stocks are higher this morning on no real news. Bonds and MBS are down again.

Fourth quarter GDP rose 2.7%, in the second revision. Third quarter growth was revised upward to 3.2%. Growth was driven primarily by inventory growth. Services spending rose, driven by housing and health care. Government spending was revised upward as well. Personal consumption expenditures were revised downward from 2% to 1.4%.

The PCE price index was also revised upward by 0.5% to 3.7%. Excluding food and energy, the index rose 0.4% to 4.3%. Needless to say, not good news on the inflation front, however we are talking about data that was far in the past at this point.

The FOMC minutes shed some further light on the comments from Loretta Mester and James Bullard last week. On the decision whether to raise 25 basis points or 50 basis points, they said:

Against this backdrop, and in consideration of the lags with which monetary policy affects economic activity and inflation, almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting. Many of these participants observed that a further slowing in the pace of rate increases would better allow them to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability as they determine the extent of future policy tightening that will be required to attain a stance that is sufficiently restrictive to achieve these goals. A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount. The participants favoring a 50 basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way.

We knew that Mester and Bullard were in the 50 basis point camp, and “a few” implies one more. The Committee noted that we had some welcome inflation prints, but more evidence of stabilization would be needed.

In other economic news, initial jobless claims came in at 192,000 (anything under 200k is exceptional) and the Chicago Fed National Activity index reversed to a positive number, primarily driven by strong employment and consumption data.

The total value of US residential real estate fell by 4.9% (or about $2.3 trillion) from its June peak, according to data from Redfin. “The housing market has shed some of its value, but most homeowners will still reap big rewards from the pandemic housing boom,” said Redfin Economics Research Lead Chen Zhao. “The total value of U.S. homes remains roughly $13 trillion higher than it was in February 2020, the month before the coronavirus was declared a pandemic.”

The Bay Area saw the brunt of the selling. New York City, Seattle and Boise also saw decreases. The suburbs held up better than the cities themselves.

Here is the official notice for the FHA mortgage insurance reduction.

More pain in the commercial real estate sector (particularly office buildings): Columbia Property Trust (owned by PIMCO) defaulted on $1.8 billion in mortgage notes on office buildings in New York City, Boston, and San Francisco. We are also seeing defaults on mortgages for shopping malls. The commercial real estate sector’s pain is being driven by rising short term rates (anyone who has floating rates is feeling the pain) and also a sea-change in office work. Note that S.L. Green keeps hitting new occupancy lows.

The problems in commercial real estate has the potential to impact residential, at least the non-QM sector.

Wells Fargo laid off hundreds of mortgage bankers this week. “We announced in January strategic plans to create a more focused home-lending business,” she said. “As part of these efforts, we have made displacements across our home-lending business in alignment with this strategy and in response to significant decreases in mortgage volume.”

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