All Things in Moderation

Vital Statistics:

Stocks are lower as we await Jerome Powell’s semiannual Humphrey-Hawkins testimony. Bonds and MBS are down.

Jerome Powell heads to the Hill this morning to testify in front of Congress. Here are his prepared remarks. He discussed the hawkish pause and the Fed’s mindset:

In light of how far we have come in tightening policy, the uncertain lags with which monetary policy affects the economy, and potential headwinds from credit tightening, the FOMC decided last week to maintain the target range for the federal funds rate at 5 to 5-1/4 percent and to continue the process of significantly reducing our securities holdings. Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year. But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, we will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks.

Mortgage applications increased 0.5% last week as purchases rose 2% and refinances decreased 2%. “The 30-year fixed mortgage rate declined for the third consecutive week to 6.73 percent, while other mortgage rates saw mixed results. Purchase applications increased, driven by a 2 percent gain in conventional purchase applications and a 3 percent increase in FHA purchase activity,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “First-time homebuyers account for a large share of FHA purchase loans, and this increase is a sign that while buyer interest is there, activity continues to be constrained by low levels of affordable inventory. Refinance applications continued their decline after the previous week’s increase, with the refinance share of applications just below 27 percent.”

The homebuilders have been on a tear this year, despite all of the pain in the mortgage market. The S&P SPDR Homebuilder ETF (XHB) has outperformed the S&P 500 by 12% YTD:

We had an upside surprise in housing starts yesterday, and new home purchase applications rose 16% in May, according to the MBA.

“Purchase activity for newly built homes was strong in May, with builders continuing to bring homes to the market and buyers keen to act on available units,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Applications for purchase loans were up on a monthly basis and increased annually for the fourth consecutive month. Our estimate of new home sales also jumped in May, up 16 percent to the fastest pace of new home sales in 15 months.”

Added Kan, “The new home sales segment continues to gather momentum, growing at a pace of 5 percent compared to a year ago, while existing-home sales in recent months continue to experience annual declines of more than 20 percent on a non-seasonally adjusted basis. These results were also broadly in line with the Census data showing an uptick in residential housing starts and permitting in recent months.”

Homebuilding is an early-stage cyclical industry, which usually leads the economy out of a recession. Investors are piling into the homebuilding stocks in anticipation of a recession and rate cuts. Note homebuilder KB Home reports after the close today. The Atlanta Fed bumped up its Q2 GDP Now estimate to 1.9% on the strong housing starts number.

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