All Things in Moderation

Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are flat.

The manufacturing economy improved in February, however it has contracted for the third consecutive month. New Orders and production contracted. Unfortunately, prices increased again which will concern the Fed. This will probably mean that February CPI and PPI reports will be disappointing.

“The U.S. manufacturing sector again contracted, with the Manufacturing PMI^® improving marginally over the previous month. With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the February composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year. New order rates remain sluggish due to buyer and supplier disagreements regarding price levels and delivery lead times; the index increase suggests progress in February. Panelists’ companies continue to attempt to maintain head-count levels through the projected slow first half of the year in preparation for a stronger performance in the second half.”

Rocket reported an 82% drop YOY drop in revenues during the fourth quarter of 2022. Origination volumes fell 75% YOY to $19 billion. Gain on sale margins also contracted to 2.17% from 2.8%. Unexpectedly high demand for the company’s promotional home purchase product was a driver of the lower margins.

“Last year marked a period of transformation for Rocket. We right-sized our business to respond to a challenging market; we also made key investments to serve our clients better on every step of their home ownership journey,” said Jay Farner, CEO of Rocket Companies. “With foundational pieces of our client engagement program in place, we are focused on expanding our top of funnel, lifting conversion and lowering our client acquisition cost, with the ultimate goal of growing our purchase market share and extending client lifetime value.”

Mortgage applications fell 5.7% last week as purchases fell 6% and refis fell 3%. The uptick in bond yields over the past few weeks drove the decrease. “The 30-year fixed rate increased to 6.71 percent last week, the highest rate since November 2022, which drove a 6 percent drop in applications. After a brief revival in application activity in January when mortgage rates dropped to 6.2 percent, there has now been three straight weeks of declines in applications as mortgage rates have jumped 50 basis points over the past month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which continues to put upward pressure on rates. Both purchase and refinance applications declined last week, with purchase index at a 28-year low for a second consecutive week. Purchase applications were 44 percent lower than a year ago, as homebuyers again retreat to the sidelines as higher rates crimp affordability. Refinance applications account for less than a third of all applications and remained more than 70 percent behind last year’s pace, as a majority of homeowners are already locked into lower rates.”  

The yield curve continues to invert, with the 10s-2s spread at -89 basis points. The last time we were at these levels was during the Volcker tightening regime during the early 1980s.

Construction spending fell 0.1% MOM and rose 5.7% YOY, according to the Census Bureau. Private residential construction fell 0.6% MOM and 3.9% YOY. There is a big divergence between multifamily, which is up 20.6% YOY and single-family which fell 18.4%. That said, single family construction is 3x the value of multi-family.

Filed under: Economy | 15 Comments »