All Things in Moderation

Vital Statistics:

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

Banks reported tightening credit standards and weakening demand in the latest Federal Reserve Senior Loan Officer Survey.

“Regarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to large and middle-market firms as well as small firms over the first quarter.² Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.”

“For loans to households, banks reported that lending standards tightened across all categories of residential real estate (RRE) loans other than government-sponsored enterprise (GSE)-eligible and government residential mortgages, which remained basically unchanged. Meanwhile, demand weakened for all RRE loan categories. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Standards tightened for all consumer loan categories; demand weakened for auto and other consumer loans, while it remained basically unchanged for credit cards.”

Small Business Optimism fell again in April, according to the NFIB. The is the sixteenth consecutive reading below the historical average. Quality of labor is the biggest concern, with manufacturing, construction and transportation showing the biggest shortages. Inventories now are too high relative to expected sales. Inflation seems to be waning.

A banking crisis does not appear to be a major risk. The bank failures were not due to bad loans, the usual cause. Defaults will rise as the economy weakens but hopefully not at pandemic levels. The manufacturing sector appears to be in contraction (ISM <50). The service sector is still in growth mode, but much weaker (ISM 51.2, down 3 points). Main street firms have been pessimistic for the last 18 months, with the NFIB Optimism Index at 89 (49 year average = 98). Price raising activity has slowed but remains historically high, and reports of higher labor compensation are sticky at historically high levels. This will make inflation sticky as labor costs are the major operating cost of small firms, especially in the service sector. The economy seems inclined to slow down and this will make raising prices harder and slow inflation. Maybe it’s time for the Fed to pause and let nature (markets) take its course.

Rate lock volume fell 22% in April, according to Black Knight. Part of this is due to more business days in March, however volumes fell 10% even after taking this into account. Overall lock volumes rose 14% over the past 3 months, however they are down about 50% from a year ago.

“Home prices rose a seasonally adjusted 0.45% in March at the national level,” said Walden. “A modest bump in homebuyer demand ran headlong into falling for-sale supply, leading to the third consecutive monthly increase in home prices after they’d been pulling back from recent peaks through the tail end of 2022, essentially nationwide. In fact, just five months ago, prices were declining on a seasonally adjusted month-over-month basis in 92% of all major U.S. markets. Fast forward to March, and the situation has done a literal 180, with prices now rising in 92% of markets from February. Despite the home price strengthening of these past couple of months, the backward-looking annual growth rate continued to cool as the influence of the red-hot spring 2022 market fades in the rearview mirror. Prices are now up just 1.0% year over year, with the annual growth rate on track to fall to roughly 0% by April.  That said, low inventory levels will limit just how far that metric will fall in coming months.”

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