All Things in Moderation

Vital Statistics:

Stocks are lower this morning after the retail sales number came in lower than expectations. Bonds and MBS are down.

Retail sales fell 1% MOM in March, according to the Census Bureau. On a year-over-year basis, sales were up 2.9%. Note that these numbers are not adjusted for inflation, so sales fell YOY on an inflation-adjusted basis. January and February sales numbers were revised downward. If you strip out vehicles and gasoline, retail sales fell 0.3% MOM.

JP Morgan reported first quarter earnings this morning. Book value rose 9%, while average deposits fell 8%. In home lending, JPM originated $5.7 billion compared to $6.7 billion in Q4 and $24.7 billion a year ago. CEO Jamie Dimon summarized the current situation as follows:

The U.S. economy continues to be on generally healthy footings —consumers are still spending and have strong balance sheets, and businesses are in good shape. However, the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks. The banking situation is distinct from 2008 as it has involved far fewer financial players and fewer issues that need to be resolved, but financial conditions will likely tighten as lenders become more conservative, and we do not know if this will slow consumer spending. We also continue to monitor for potentially higher inflation for longer (and thus higher interest rates), the inflationary impact of continued fiscal stimulus, the unprecedented quantitative tightening, and geopolitical tensions including relations with China and the unpredictable war in Ukraine

Provisions for loan losses grew. The stock is up about 6% pre-open. Separately, Wells and Citi also reported stronger-than-expected earnings.

Industrial Production rose 0.5% in March, while manufacturing production fell 0.5%. Capacity utilization rose to 79.8%. Meanwhile, import and export prices both fell.

Chicago Fed President Austan Goolsbee spoke on CNBC this morning and made some dovish comments. “There is no way you can look at current conditions around the U.S. and not think that some mild recession is on the table as a possibility,” Goolsbee said, in an interview on CNBC.   “What I am looking at quite clearly coming into the next FOMC meeting is what’s happening on credit…how much of a credit crunch is there,” he said. “Let’s be mindful that we’ve raised a lot. It takes time for that to work its way through the system,” Goolsbee said. “If you add financial stress on top of that, let’s not be too aggressive.

Consumer sentiment rose in April, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment was essentially unchanged this month, inching up less than two index points from March. Sentiment is now about 3% below a year ago but 27% above the all-time low from last June. Rising sentiment for lower-income consumers was offset by declines among those with higher incomes. While consumers have noted the easing of inflation among durable goods and cars, they still expect high inflation to persist, at least in the short run. On net, consumers did not perceive material changes in the economic environment in April.”

Year ahead inflationary expectations rose from 3.6% to 4.6%, which is not good if you want the Fed to slow down. That said the UM survey’s inflations expectations tend to be volatile. Longer-run expectations were flat at 2.9%.

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Vital Statistics:

Stocks are higher this morning after another benign inflation report. Bonds and MBS are up.

The producer price index, which measures inflation at the wholesale level, fell 0.5% in March. The decline was driven by a 5.1% decrease in energy prices. The core rate, which strips out food, energy and trade services rose 0.1%. The Street was looking for a flat number, so the decline was a positive surprise.

Initial jobless claims inched higher, rising to 239k. Claims are moving higher, although we are still at extremely low levels if you look at historical numbers

The FOMC minutes were released yesterday. The Silicon Valley Bank situation was still new, but the committee was still focused primarily on inflation:

Participants agreed that the U.S. banking system remained sound and resilient. They commented that recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. Participants agreed that the extent of these effects was uncertain. Against this Federal Open Market Committee background, participants continued to be highly attentive to inflation risks…

Many participants remarked that the incoming data before the onset of the banking sector stresses had led them to see the appropriate path for the federal funds rate as somewhat higher than their assessment at the time of the December meeting. After incorporating the banking-sector developments, participants indicated that their policy rate projections were now about unchanged from December…

With inflation still well above the Committee’s longer run goal of 2 percent, participants agreed that inflation was unacceptably high. Participants commented that recent inflation data indicated slower-than-expected progress on disinflation. In particular, they noted that revisions to the price data had indicated less disinflation at the end of last year than had been previously reported and that inflation was still quite elevated.

Bonds rallies slightly on the FOMC minutes, but nothing dramatic.

United Wholesale is offering 1% down loans. If the borrower brings 1% down, UWM will fill in the other 2%, up to $4,000. “We are bringing back the Conventional 1% Down to give independent mortgage brokers a competitive edge with borrowers and real estate agents, while also helping make homeownership more affordable and accessible for borrowers across the country,” said Mat Ishbia, president and CEO of UWM. “We’re going to continue developing products and solutions that will help get more borrowers into homes faster, easier and cheaper and Conventional 1% Down is a great example of how we’re doing that.”

The program is limited to people who are at or below 50% of the area median income. I suspect affordability constraints are going to make it difficult for borrowers under 50% of AMI to qualify.

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Vital Statistics:

Stocks are higher after the consumer price index came in lower than expectations. Bonds and MBS are up.

Prices at the consumer level rose 0.1% MOM and 5.0% YOY. Shelter was the big driver, as food and energy prices both fell. If you strip out food and energy, the core rate rose 0.4% MOM and 5.6% YOY. It looks like the spike we saw in January and February is over.

Chicago Fed president Austan Goolsbee made dovish comments yesterday, urging the Fed to use caution on further rate hikes. His point is that the banking crisis will restrict credit which will act as further tightening. The Fed meeting is May 2-3, so we will get one more PCE reading before the meeting. But other data points – ISM, NFIB, etc are showing price pressures are declining.

The Fed Funds futures have trimmed their expectations for the May meeting slightly, but are still tilted towards a final 25 basis point hike in the Fed Funds rate.

Mortgage applications increased 5.3% last week as purchases rose 8% and refis rose 0.1%. Refis are down 57% from a year ago. “Incoming data last week showed that the job market is beginning to slow, which led to the 30-year fixed rate decreasing to 6.30 percent – the lowest level in two months,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Prospective homebuyers this year have been quite sensitive to any drop in mortgage rates, and that played out last week with purchase applications increasing by 8 percent. Refinance application volume was a mixed bag with total volume essentially flat, conventional volume down for the week, but VA refinance volume increasing. The level of refinance activity remains almost 60 percent below last year, as most homeowners are currently locked in at much lower rates.”

Mortgage Credit Availability increased in March, according to the MBA. “Mortgage credit supply increased modestly in March but remained close to its tightest levels since 2013. With the spring buying season underway, lenders are grappling with the threat of a recession and tighter overall financial conditions following the recent bank failures,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The supply of government mortgage credit – which includes FHA and VA loans that many first-time homebuyers rely on – declined for the third time in four months, which could potentially hinder first-time buyer activity. There was a small increase in credit availability for jumbo loans, with more programs offered for cash-out refinances. However, we expect banks, which account for most of the jumbo market, will tighten jumbo credit criteria in response to recent challenges in the banking sector.”

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are down small.

Small Business Optimism fell again in March, according to the NFIB Small Business Optimism Survey. Small business owners are hunkering down for a recession, and are generally dour about future sales and earnings. The Silicon Valley Bank situation doesn’t appear to be affecting access to credit, as the vast majority are finding their credit needs met. Workers are still hard to find in the wholesale, transportation and construction businesses.

Prices are still elevated, but it looks like things continue to work back towards historical averages.

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Rate lock volume increased 43% in March, according to Black Knight. Purchase lock volumes rose 44%, which is well above the normal Spring Selling Season bump of 30%. Refi locks rose as well. FHA lock volume rose to 20% as a less competitive real estate market pushed more sellers to accept bidders with FHA loans.

“This continues to be an incredibly rate-sensitive housing market, and March’s rate lock activity perfectly illustrates this dynamic,” said Andy Walden, vice president of enterprise research at Black Knight. “Early in the month, when rates started their climb back toward 7% – reaching 6.8% in the process – we saw pronounced downward pressure on originations. In the wake of uncertainty in the banking sector and investors’ flight to the safe haven of U.S. Treasuries, rates came down roughly a quarter of a point. The result? Another quick surge in originations, particularly in the purchase market.”

Home Point has agreed to sell its wholesale ops to The Loan Store, an Arizona-based wholesaler. “Due to the tremendous effort of our associates and the support of our broker partners, we have built Homepoint from a startup to the third-largest wholesale lender,” said Willie Newman, President and CEO of Homepoint. “After careful consideration, and in light of current market conditions, we have decided to sell our wholesale originations business to The Loan Store. We believe this is the best decision for our company to continue to deliver value to Home Point shareholders.”

As a result of this transaction, Home Point is basically a MSR portfolio with an equity stake in the Loan Store. It no longer originates mortgages.

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Vital Statistics:

Stocks are lower this morning as they react to Friday’s jobs report. Bonds and MBS are down. Volumes are light overall as many European markets are closed today.

The main event this week will be the consumer price index on Wednesday. The Street is looking for a 0.3 MOM / 5.2% YOY gain in the headline number. It sees the core rate (ex-food and energy) rising 0.4% MOM and 5.3% YOY.

Earnings season kicks off on Friday with a lot of the big mega-banks reporting. The regional banks will be under the microscope and the issue of deposits will loom large, though concerns in the commercial real estate sector (especially office properties) will be a focus as well.

The calendar will be somewhat light on Fed-speak as well.

The Fed Funds futures turned a bit more hawkish after Friday’s jobs report, with the May contracts now seeing a 70% chance for a rate hike, which would take the rate to 5%. So far, that seems to be the peak and the end-of-year contracts see the Fed Funds rate at 4.25%.

I discussed Friday’s jobs report in this week’s Substack piece. Check it out and please consider subscribing. The report wasn’t all bad news for the Fed – in fact there were some positive things in that report.

The Atlanta Fed’s GDP Now tracker sees Q1 GDP coming in at 1.5%. This is a pretty hefty decelerations after the banking crisis began.

Net production income for independent mortgage bankers fell to a $301 loss, according to the MBA. This is a series low for the index, which began in 2008.

“For the first time since the inception of MBA’s report in 2008, net production income was in the red in 2022, with losses averaging 13 basis points. The rapid rise in mortgage rates over a relatively short period of time, combined with extremely low housing inventory and affordability challenges, meant that both purchase and refinance volume plummeted,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “The stellar profits of the previous two years dissipated because of the confluence of declining volume, lower revenues, and higher costs per loan.”

Added Walsh, “Production revenues declined in 2022, but the bigger story was that production expenses ballooned to a study high of $10,624 per loan. Companies could not adjust their capacity fast enough. The number of production employees declined, but not at the same pace as origination volume. As a result, productivity in 2022 fell to a low of 1.5 closed loans a month per production employee.”

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ital Statistics:

The stock market is closed today, and the bond market closes early. Bonds and MBS are down on the jobs report.

The economy added 236,000 jobs in March, according to BLS. The unemployment rate ticked down 0.1% to 3.5%. Average hourly earnings rose 0.3% MOM and 4.2% YOY. Overall, the report was more or less in line with expectations. The labor force participation rate and the employment-population ratio rose, which shows that more workers are re-entering the labor market.

Bonds are selling off on the report given that unemployment ticked down again. That said, I think on balance the report should be good news for the Fed / bond market given that the employment-population ratio rose from 60.2% to 60.4%. Pre-pandemic the employment-population ratio was 61.1%, so we are still not back to normalcy, but we are getting closer. To put these numbers into perspective, the EP ratio was 57.4% at the end of 2020 and 59.5% at the end of 2021.

The Fed would like to see labor supply and demand more in balance. By raising interest rates, the Fed is trying to reduce demand for labor. If supply increases, that would accomplish the same thing, and that is much less painful than a recession-induced spike in unemployment.

As we saw in Wednesday’s ADP report, wages are rising smartly (and some of the lowest-paid jobs like leisure / hospitality) are seeing high single-digit annual gains. Wage increases are drawing workers back into the labor force, and that will go a long way towards balancing the market. Workers are not only coming back into the market, but job openings are falling as well. Ultimately the labor supply-demand situation is working itself out in the least painful way. This gives the Fed ammo to halt the tightening cycle.

The Atlanta Fed’s GDP Now Index has declined sharply over the past few weeks, with the index now seeing 1.5% growth in Q1. The index was at 3.5% just a few weeks ago. It looks like the ISM reports, along with weaker consumption numbers pulled down the index, not the banking issues.

The jobs report did put some starch in the May Fed Funds futures, which are now handicapping a 2/3 chance of another 25 basis point hike. A day ago, they saw a 50% chance.

Filed under: Economy | 36 Comments »

Vital Statistics:

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

The services economy expanded in March, albeit at a much slower rate than in February, according to the ISM Services Index. We saw pretty dramatic declines in new orders and a deceleration in prices. The employment index fell as well, which means the Fed should be pretty happy with these numbers. “There has been a pullback in the rate of growth for the services sector, attributed mainly to (1) a cooling off in the new orders growth rate, (2) an employment environment that varies by industry and (3) continued improvements in capacity and logistics, a positive impact on supplier performance. The majority of respondents report a positive outlook on business conditions.”

Lock volume rose 24% in March, according to the MCTLive Lock Index. Locks increased throughout all categories, with purchases up 23%, rate / term up 39% and cash-out refis up 28%. Part of this is of course seasonal, however lower interest rates are helping matters as well.

Western Alliance announced its earnings date and gave an update on its business. The company’s liquidity covers the number of uninsured deposits by 1.4x, and insured deposits increased to 68% of total deposits. Western Alliance is getting lumped in with Silicon Valley Bank, which is somewhat unfair given that SVB was kind of a one-trick pony and Western Alliance is more diversified with its mortgage ops. The Street expects WA to earn $9.11 this year, which puts the stock on a P/E of 3.2x with a 37% discount to book.

US employers announced 89,703 job cuts in March, according to outplacement firm Challenger, Gray and Christmas. This is up 15% from February and more than triple the number a year ago. “We know companies are approaching 2023 with caution, though the economy is still creating jobs. With rate hikes continuing and companies’ reigning in costs, the large-scale layoffs we are seeing will likely continue,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc. 38% of the cuts were in tech. Separately, initial jobless claims rose to 228k, which is further confirmation the labor economy is slowing down.

Filed under: Economy | 49 Comments »

Vital Statistics:

Stocks are lower this morning on renewed recession fears. Bonds and MBS are up.

Private employers added 145,000 jobs in March, according to the ADP Employment Report. This was lower than the 200,000 expectation, and is well below the 240,000 forecast for Friday’s payroll number. Annual pay increased for job stayers by 6.9%, while people who switched jobs saw a 14.2% increase. “Our March payroll data is one of several signals that the economy is slowing,” said Nela Richardson, chief economist, ADP. “Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down.”

Leisure / hospitality was the biggest gainer, with 98,000 jobs, while we saw declines in finance and professional / business services. Manufacturing also fell. That said, the softening of the labor market looks to be occurring in the white collar sectors, not the blue collar sectors.

Still the pay increases, especially in services ex-housing will be a thorn in the Fed’s side. Look at the pay increases for leisure / hospitality – pushing 10%.

Mortgage applications fell 4.1% last week as purchases fell 4% and refis fell 5%. “Spring has arrived, but the housing market is missing the customary burst in listings and purchase activity that typically mark the season. After four weeks of increasing purchase application activity, volume declined a bit this week even with another small drop in mortgage rates,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Additionally, refinance application volume continues to be quite low. Although the mortgage rate for conforming balance loans declined by five basis points over the week to 6.40 percent, the mortgage rate for jumbo loans increased by nine basis points to 6.36 percent.  While we have seen relative weakness at the high end of the housing market in recent months, the divergence in rates suggests that banks may be tightening credit in response to recent challenges, preserving balance sheet capacity as deposit balances have declined. In recent years, most jumbo loans have been kept on depository balance sheets.”

Conforming versus jumbo rates YTD:

Jamie Dimon put out his annual shareholder letter yesterday, and discussed the banking crisis, which he says is not over.

Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight. Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known – both to regulators and the marketplace. The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep. It is unlikely that any recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise of interest rates placed heightened focus on the potential for rapid deterioration of the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits. Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements. Even worse, the stress testing based on the scenario devised by the Federal Reserve Board (the Fed) never incorporated interest rates at higher levels. This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them.

It is fascinating that the Fed’s stress tests didn’t envision that an environment of rising interest rates could cause trouble given that this was precisely the situation in the 1970s that was the impetus for banking deregulation and the S&L crisis in the 1970s.

As he points out, this is not going to be a replay of 2008 – we are talking about Treasuries and MBS, which are money good. The ultimate recovery on these bonds is par, not something like 50 or 60. Silicon Valley Bank made an interest rate bet and was wrong,or more charitably, early.

Jamie Dimon goes on to talk about the necessity of the regional banks, and it is clear that JP Morgan isn’t interested in taking over a bunch of deposits fleeing the regional and smaller banks.

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Vital Statistics:

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

Job openings decreased from 10.6 million in January to 9.9 million in February. It looks like openings fell across most business sectors. This is evidence the Fed’s tightening is finally getting some traction on the labor market. The quits rate inched up, however it still lower than late last year. Quits are often a leading indicator for wage increases.

The bond market rallied on the number, with the 10 year yield falling 7 basis points immediately after the report.

Home prices rose marginally in February, according to Black Knight. This was the first increase in 8 months. Black Knight attributes this to the decline in rates in the beginning of February bringing buyers back into the market. That said, inventory remains extremely tight and isn’t improving. Some of the usual suspects – places like Miami – saw increases.

Overall prices rose 0.16% MOM and rose 1.94% YOY. “The unfortunate reality is that the scarce supply of inventory that’s the source of so much market gridlock isn’t getting any better. In fact, seasonally adjusted inventory levels continued to deteriorate in February, marking not only the fifth straight month of such declines, but also the largest inventory deficit we’ve seen since May of last year, with more than 90% of markets seeing such deficits grow in February. New listings – already trending well below pre-pandemic levels for months – ran 27% below those levels in February as potential home sellers continued to shy away from the market. All in, total active for-sale inventory is back to 47% below pre-pandemic levels after having recovered to within 38% of normal levels late last year. Without a significant shift in interest rates, home prices or household income, this is a self-fulfilling dynamic that is quite likely to continue for some time.”

You would think with such low inventory that the homebuilders would step into the breach, but their cancellation rates were pretty elevated in their fourth quarter numbers, and many are in the process of just burning off their backlog.

Private residential construction fell 0.6% month-over-month / 5.7% year-over-year in February. Single family construction was down big: 1.8% MOM and 21.4% YOY. On the other hand multifamily was up big: 1.4% MOM and 22.% YOY

You can see the divergence below. Single family remains the dominant component of housing starts, but it has been in decline while multi has kind of stayed in a range. The construction spending numbers suggest that multi-fam is accelerating.

CoreLogic reported that home prices rose 0.8% MOM and 4.4% YOY in February.

“The divergence in home price changes across the U.S. reflects a tale of two housing markets,” said Selma Hepp, chief economist at CoreLogic. “Declines in the West are due to the tech industry slowdown and a severe lack of affordability after decades of undersupply. The consistent gains in the Southeast and South reflect strong job markets, in-migration patterns and relative affordability due to new home construction.”

“But while housing market challenges remain, particularly in light of mortgage rate volatility and the ongoing banking turmoil,” Hepp continued, “pent-up homebuyer demand is responding favorably to lower rates in many markets. This trend holds true even in the West, leading to a solid monthly gain in home prices in February. U.S. home prices rose by 0.8% in February, double the month-over-month increase historically seen and indicating that prices in most markets have already bottomed out.”

Home price appreciation does exhibit a seasonal variation, and it looks like home prices started rising at the beginning of the Spring Selling Season.

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Vital Statistics:

Stocks are lower this morning after OPEC voted to restrict production over the weekend. Bonds and MBS are down.

The jobs report on Friday will be the big event for the week, along with the ISM data. The bond market will close early on Friday.

FHFA is making the COVID-era six month deferral permanent, allowing borrowers to skip up to six monthly payments and then tack them on to the end of the mortgage. “The Enterprises completed more than one million COVID-19 payment deferrals during the pandemic, helping borrowers nationwide to stay in their homes,” said FHFA Director Sandra L. Thompson. “Based on the success of the COVID-19 payment deferral, we are making this solution a key part of our standard loss mitigation toolkit that is available to all borrowers with eligible hardships.”

More evidence that the bank deposit run of a few weeks ago is abating. Raymond James points out that smaller banks are gaining deposits. Overall, deposits did fall, but they came out of the larger banks and the foreign-domiciled ones. “Essentially, the liquidity crisis, if it even was one outside a handful of banks, appears to be easing, which should be good news for banks and financials, which were the worst performing sector in Q1,” the strategist wrote. “It makes very little sense we would have a broad liquidity crisis in the banking system when there is so much excess liquidity (cash) sloshing around,” he said.

The manufacturing economy contracted in March, according to the ISM Manufacturing Survey.  “The U.S. manufacturing sector contracted again, with the Manufacturing PMI^® declining compared to the previous month. With Business Survey Committee panelists reporting softening new order rates over the previous 10 months, the March 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 late summer/early fall period. New order rates remain sluggish as panelists become more concerned about when manufacturing growth will resume. Supply chains are now ready for growth, as panelists’ comments support reduced lead times for their more important purchases. Price instability remains, but future demand is uncertain as companies continue to work down overdue deliveries and backlogs. Seventy percent of manufacturing gross domestic product (GDP) is contracting, down from 82 percent in February.”

My weekly Substack piece focuses on the Greenspan Put and if it will make a re-appearance with the banking instability. Check it out and please consider subscribing.

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