All Things in Moderation

Vital Statistics:

Stocks are lower after the Fed produced a hawkish pause yesterday. Bonds and MBS are flat.

The Fed delivered a hawkish pause, skipping a rate hike in June but signaling there is still more to come. They increased the estimate for 2023 GDP growth to 1% from 0.4%, lowered their unemployment estimate from 4.5% to 4.1% and increased their forecast for 2023 core PCE growth from 3.6% to 3.9%.

They predicted another two rate hikes this year in the dot plot. The March / June comparison is below:

They see a Fed funds rate of 5.5% at the end of 2023 versus 5% in March. The outer years were pushed up as well. At the press conference, Jerome Powell telegraphed that the Fed is going to hike in July, by referring to the June meeting as “the skip.” and characterizing the July meeting as “live.”

The Fed Funds futures see a 65% chance for another hike in July, but are assigning a low probability for anything further. At some point we probably are going to have a recession. Historically, tightening cycles have triggered recessions and this one has been the most aggressive since Paul Volcker’s dramatic moves in the early 1980s which caused the deepest recession since the Great Depression. While it is always tempting to think this time is different, it probably isn’t.

Separately, the ECB hiked rates by 25 basis points this morning.

In other economic data, retail sales rose 0.3%, which was better than expected. Consumption remains strong, but the resumption of student loan payments looms at the end of the summer. Initial Jobless claims were steady at 262k, and industrial production fell 0.2%.

Homebuilder Lennar reported better-than-expected earnings however they were down on a year-over-year basis. Stuart Miller, Executive Chairman of Lennar, said, “During the quarter, we continued to see the housing market
normalize and recover from the Fed’s 2022 aggressive interest rate hikes in response to elevated inflation. As consumers have come to accept a “new normal” range for interest rates, demand has accelerated, leaving the market
to reconcile the chronic supply shortage derived from over a decade of production deficits. Simply put, America needs more housing, particularly affordable workforce housing, and demand is strong when price and interest rates are affordable.”

The press release didn’t mention cancellation rates, but it will probably come up on the conference call. Another interesting tidbit from the press release: “Our cycle time during the quarter was down slightly sequentially, and we believe it will decline further in the back half of the year as the improving supply chain and labor market will positively impact our production times.

Homebuilders in general have been gun-shy to build single-family residences in the aftermath of the bubble, and then supply chain and labor issues have been the impediment. It seems that perhaps this might be easing. Skilled labor is in high demand and plumbers / electricians can make a boatload – certainly more than most college graduates their age.

The homebuilders have been on a tear this year, with the S&P SPDR homebuilder ETF outperforming the S&P 500 by a large amount.

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Vital Statistics:

Stocks are flattish as we await the Fed decision. Bonds and MBS are down.

The Fed decision is due at 2:00 pm today, and Jerome Powell will hold a press conference afterward. The Fed Funds futures overwhelmingly see the Fed maintaining the current Fed Funds range of 5% – 5.25%. The consensus seems to be the Fed will do a hawkish pause, meaning they will skip hiking this meeting and leave the door open for another hike in July. We probably aren’t going to get an all-clear signal out of them.

The dot plot will be the focus for the markets. The March dot plot showed the majority of members saw the end-of-2023 Fed Funds rate in the current range. There were a few members who thought rates could go higher. I wouldn’t be surprised to see the economic projections revised as well, especially GDP which was forecast to rise 0.5% this year. With Q1 coming in at 1.1% and the Atlanta Fed GDP Now Index seeing a 2.2% increase in Q2, the economy would have to fall off a cliff to make that 0.5% forecast. The unemployment forecast of 4.5% is probably too high as well.

We got another benign inflation report with the Producer Price Index declining 0.3% in May. On a YOY basis, the index rose 1.1%, which is below the Fed’s target rate for inflation. If you strip out food, energy and trade services, the index was flat in May and up 2.8% on an annual basis. About 60% of the decline in the headline number was due to lower gasoline prices.

Mortgage applications rose 7.2% last week as purchases rose 17% and refis increased 6%. “Mortgage rates declined for the second straight week, with the 30-year fixed rate decreasing to 6.77 percent. Mortgage applications were up over the week, but remained well below levels from a year ago,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Rates that are still more than a percentage point higher than a year ago, and low for-sale inventory continue to constrain homebuying activity in many markets. The average loan size on a purchase loan decreased for the third straight week, as we continue to see more first-time homebuyer activity in the purchase market. Refinance applications accounted for less than a third of all applications and remained more than 40 percent behind last year’s pace. Elevated rates have reduced the benefit of a rate/term refinance for many borrowers and continue to discourage cash-out refinances as borrowers are unwilling to give up their lower rates.”

Comerica is exiting the mortgage banker finance business. This should primarily affect the warehouse lending business.

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Vital Statistics:

Stocks are higher after May inflation came in lower than expected. Bonds and MBS are flat.

Consumer prices rose 0.1% MOM and 4% YOY. Shelter and used cars / trucks were the big contributing factors. Shelter increased 0.8%, however home prices peaked in June of last year so the inflationary push of this component is expected to fade in the coming months.

Jerome Powell has mentioned 3 basic components for inflation – goods, housing, and services ex-housing. The goods issue was driven by supply chain issues in the early days of COVID. That component of inflation is largely finished, and if you look at the ISM reports they pretty much confirm that inventory issues are no longer a problem. The real estate component is likely to fade as the year-over-year comparisons on home prices become much easier.

Finally services ex-real estate are working lower as well. Below is a chart of the CPI with services ex-real estate.

We are still elevated, but the index is falling rapidly. Services ex-real estate is really a proxy for wage inflation. We have seen layoffs in the tech sector, and job openings are working their way lower. Consumer expectations for inflation are decreasing as well.

The Fed Funds futures have moved decisively to a pause forecast for the June FOMC meeting. Certainly the CPI print gives them the leeway to do that. The July futures still see a 60%+ chance for another hike. Before the July meeting, we will get the May PCE inflation reading, and the June CPI / PPI.

Commercial real estate continues to struggle, especially in the office sector. The office sector is reeling from rising interest rates and work-from-home. Manhattan’s official vacancy rate is 17%, and should remain above 20% for the next several years. The unofficial vacancy rate is closer to 50%. Goldman sees continued pain the CRE sector. “There’s no question that the real estate market, and in particular commercial real estate, has come under pressure,” he said in an interview on CNBC’s “Squawk on the Street.” “You’ll see some impairments in the lending that would flow through our wholesale provision” this quarter.

Small Business Optimism increased in May, according to the NFIB. Inflation remains the single biggest problem, although it has eased from its peaks last summer. Job openings are still hard to fill, and average selling prices are increasing overall. Overall optimism still remains historically low:

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Vital Statistics:

Stocks are higher as we begin Fed Week. Bonds and MBS are up.

The week ahead will be dominated by the Fed decision, although we do have some important economic data. The Consumer Price Index will be released tomorrow, and that could impact the Fed’s decision. While the Fed Funds futures have a 74% chance of no increase, the markets are interpreting that as a “skip” not a “stop.” The July Fed Funds futures are assigning a 65% chance for a rate hike if nothing happens in June. Tightening credit may also be driving the narrative for a skip.

The Fed is caught between a credit crunch and inflation. “If inflation is going to fall quickly…we might be in a position to be able to cut rates, if not this year, then soon in the new year,” said Minneapolis Fed President Neel Kashkari in an interview last month. “But if, on the other hand, inflation is much more persistent and much more entrenched…then I think the stresses in the banking sector probably become more serious.” 

The dot plot will be critical. At the March meeting, the FOMC largely forecasted that the Fed Funds rate would be at the current level, with a few forecasts for higher rates. I go into way more detail on this in my weekly Substack piece.

UBS sent a note to its clients expecting a hard landing, with GDP set to contract 1% in the coming quarters. Their model sees a 80% recession risk:

Aside from the Fed decision and the CPI, we will also get retail sales and consumer sentiment. Homebuilder Lennar reports earnings on Wednesday. The homebuilders have been on fire this year, with the S&P Homebuilder ETF (XHB) up 22% year-to-date.

Homebuilders report that there is still a shortage of lots, although it is better than it was in 2021. While you would think that work-from-home would make the exurbs more marketable, the issue is credit. Credit for developers is expensive and scarce. In addition, overall costs are higher and it is hard for builders to construct new homes that are affordable. Government regulation adds $94k to the price of a home alone.

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Vital Statistics:

Stocks are flattish this morning after we round out a week with limited economic data and no Fed-speak. Bonds and MBS are flat as well.

Another slow news day.

Housing affordability improved in the first quarter of 2023, however affordability issues remain, according to the NAHB. This was driven by wage growth, with flattish home price growth and a decline in mortgage rates. Given the shortage of skilled labor and cost of building materials, new construction will have a limited effect on affordability, which means that wage growth will have to do the heavy lifting here.

Household net worth increased to $148.835 in the first quarter of 2023, according to the Federal Reserve. Meanwhile, assets held by the Federal Reserve banks fell to just under $8.4 trillion. The Fed has reduced its balance sheet by some $500 billion since it started QT in March of 2022. It had tried QT before in 2018, and reduced its balance sheet by $700 billion before problems in the repo market caused it to halt the process.

The Atlanta Fed’s GDP Now Index sees 2.2% growth in Q2. This is surprising given that the ISM data has been pretty weak for manufacturing and the services economy seems to be decelerating as well. Global growth has been downgraded by the IMF, and China is struggling with deflation.

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Vital Statistics:

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

The Bank of Canada unexpectedly hiked rates 25 basis points yesterday, triggering a sell-off in global sovereign debt. Fears about the impending sale of $1 trillion in T-bills isn’t helping things either. The yield curve inversion has increased over the past couple of weeks:

Rate lock volume fell 16% in May compared to April according to MCT’s Rate Lock Index. Purchase volume was down 15% while refi volume fell 22%. Overall lock volumes are down 29% compared to last year. MCT’s lock index is more reliable than the MBA’s mortgage application index in that it eliminates the multiple application problem for a single loan. Regardless, times are tough out there in the mortgage space.

Initial Jobless claims increased to 261k last week. This is the highest level since October of 2021. While claims are still low on a historical basis, it looks like the Fed’s tightening policy is getting some traction in the labor market.

Overall, the groundwork is being laid for lower rates going forward. The Fed Funds futures still see a 70% chance for a pause in June. Student loan repayments will resume in August, which will crimp consumption. The Eurozone economy is officially in a technical recession, and the ISM data shows US manufacturing is contracting and the services economy is slowing. Increased capital requirements for banks will push long-term rates down, at least at the margin. Notwithstanding the jobs report last week, the evidence is pointing towards a cooling labor market. The volatility in the bond market (measured by the MOVE Index) is falling again, which should help MBS spreads. While it is hard to be optimistic in the mortgage space right now, the second half of 2023 should be better than the first.

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

Mortgage applications decreased 1.4% last week as purchases fell 2% and refis fell 1%. The number contains an adjustment for the Memorial Day holiday. “Mortgage rates declined last week from a recent high, but total application activity slipped for the fourth straight week. The 30-year fixed rate dipped to 6.81 percent, 10 basis points lower than last week but still the second highest rate of 2023,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall applications were more than 30 percent lower than a year ago, as borrowers continue to grapple with the higher rate environment. Purchase activity is constrained by reduced purchasing power from higher rates and the ongoing lack of for-sale inventory in the market, while there continues to be very little rate incentive for refinance borrowers. There was less of a decline in government purchase applications last week, which was consistent with a growing share of first-time home buyers in the market.”

With the debt ceiling deal in place, Treasury is poised to issue more than $1 trillion in short-term debt to keep the lights on. This will push up short term rates at least in the near-term, which won’t be supportive for mortgage rates. MBS spreads continue to hang out at the highest levels since the Reagan Administration.

Another headache for the mortgage industry: All-cash buyers are the highest since 2014, coming in at 33%. With higher rates and home prices more borrowers are opting for FHA loans. FHA loans are back to pre-pandemic levels, while jumbo loans are declining.

“A homebuyer who can afford to pay in all cash is weighing two potential paths,” said Redfin Senior Economist Sheharyar Bokhari. “They can use cash to pay for the home and avoid high monthly interest payments, or take out a loan and pay a high mortgage rate. In that case, they could use the money that would have gone toward an all-cash purchase to invest in other assets that offer bigger returns, which could partly cancel out their high mortgage rate.”

“Buyers who can’t afford to pay in all cash also have two potential—but different—paths,” Bokhari continued. “They can avoid a high mortgage rate by dropping out of the housing market altogether, or they can take on a high rate. That discrepancy is the reason the all-cash share is near a decade high even though all-cash purchases have dropped: Affluent buyers have the choice to pay cash instead of dropping out of the market.” 

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Vital Statistics:

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

The services economy expanded at a slower pace in May, according to the ISM Services Report. “There has been a pullback in the rate of growth for the services sector. This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand. The majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy.”

The prices index continues to decline, which is good news for the Fed. Over the past month, the percentage of companies raising prices has fallen from 35% to 25%. They aren’t cutting yet; the number of companies maintaining prices has risen from 60% to 69%. Employment entered contractionary territory, which should put additional downside pressure on inflation. Sentiment was summarized by: “We are trying to do more with the same staff because margins in the industry have compressed” and “Our company is currently on a hiring freeze until there’s a better understanding of where the economy is headed.”

Home prices rose 2% YOY in April, according to CoreLogic. Home prices were accelerating at 20% last year at this time, so this is a big slowdown. It looks like prices peaked in June of 2022, so we should start seeing YOY declines before long. The reasons for the slowdown are well know: mainly high mortgage rates are keeping potential buyers on the sidelines and potential sellers in their homes.

The top states in terms of percentage gains were Indiana and New Jersey. The losers were all concentrated on the West Coast and in the Mountain states.

The first-time homebuyer has been slammed by affordability issues, and will be negatively affected by the resumption of student loan payments in August. Unfortunately, mortgage rates continue to rise faster than the 10-year. The spread between the 30 year fixed rate mortgage and the 10 year bond yield has surpassed the highs of last year and the 2008 financial crisis and is back at levels last seen when the Smith’s The Queen Is Dead was released.

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Vital Statistics:



Stocks are flattish as oil surges on an OPEC production cut. Bonds and MBS are down.



The week ahead is relatively data-light as is typical in the week after the jobs report. The Fed is in the quiet period ahead of next week’s FOMC meeting, so there won’t be any Fed-speak either.



Regulators are planning to increase capital requirements for the big banks by up to 20% in response to the regional bank crisis that took down Silicon Valley Bank and others. Even banks that rely primarily on fee income will see an increase. The plan is to characterize fee income as an operational risk. I didn’t see anything regarding mortgages – especially servicing, however I would imagine they might look again at capital hits for servicers.

Regulators also intend to do something about held-to-maturity securities which are underwater.



Investor purchases of homes fell by almost 50% in the first quarter compared to a year ago. This is the largest decline on record, and occurs as asking rents are beginning to level out (or even decline in some markets) while borrowing costs are surging.

“While investors have pumped the brakes on home purchases, they’re still scooping up a bigger share of homes than they were before the pandemic, which can create challenges for individual buyers at a time when there are so few homes for sale,” said Redfin Senior Economist Sheharyar Bokhari. “Investors have gravitated toward more affordable properties due to still-high housing costs and rising mortgage rates, which has left first-time homebuyers with fewer starter homes to choose from.”

Interestingly, the number of multi-family units under construction is massive as apartments flood the market. Single-family construction remains moribund.



With the debt ceiling business taken care of, the next shoe to drop will be the resumption of student loan payments starting in September. There are an estimated 27 million borrowers who will resume an average monthly payment of $400 – $460. This will almost assuredly knock down consumer spending and I wouldn’t be surprised if the record-low delinquency numbers return to normal.



The service sector improved in May, according to the S&P PMI. “The US continued to see a two-speed economy in May, with the sluggishness of the manufacturing sector contrasting with a resurgent service sector. Businesses in sectors such as travel, tourism, recreation and leisure are enjoying a mini post-pandemic boom as spending is switched from goods to services.

“However, just as demand has moved from goods to services, so have inflationary pressures. While goods price inflation has fallen dramatically in May to register only a marginal increase, prices charged for services continue to rise sharply. Although down considerably on last year’s peaks, service sector inflation remains higher than any time in the survey’s 10-year history prior to the pandemic, bolstered by a combination of surging demand and a lack of operating capacity, the latter in part driven by labor shortages. “However, while rejuvenated service providers will make hay in the summer season, the weakness of manufacturing raises concerns about the economy’s resilience later in the year, when the headwind of higher interest rates and the increased cost of living is likely to exert a greater toll on spending.”

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Vital Statistics:

Stocks are higher this morning after a good jobs report. Bonds and MBS are down.

The economy added 339,000 jobs in May, according to the Employment Situation Report. This was way bigger than the 190,000 the Street was looking for. Strangely, the unemployment rate ticked up from 3.4% to 3.7%, which was driven by a 310,000 decrease in the number of people employed. Seems odd.

Average hourly earnings rose by 0.3% MOM and 4.3% YOY. Wage inflation continues to decelerate, which is the Fed’s primary focus for inflation:

So, we saw in the ISM report that supply chain issues are done, and commodity price inflation is largely over. Home prices peaked a year ago, so this component of inflation is about to fade, though rents tend to lag home prices by about 21 months on average. And wage inflation continues to work its way lower. The Fed Funds futures are still leaning towards a pause at the FOMC meeting in a couple of weeks.

St. Louis Fed President James Bullard released a piece yesterday where he compared the current Fed Funds rate against the suggested rate using the Taylor Rule, which has been a widely-used model for monetary policy over the past 30 years. According to this model, which gives a range of rates, the Fed Funds rate is back in the range after a long time below it. Monetary policy was too tight in early 2019, and the Fed began easing in late 2019. It was correct afterward until late 2021, when the Fed got behind the curve.

“While both headline and core PCE inflation have declined from their peaks in 2022, they remain too high. An encouraging sign that inflation will decline to 2% comes from market-based inflation expectations, which had moved higher in the last two years but have now returned to levels consistent with the 2% inflation target. The prospects for continued disinflation are good but not guaranteed, and continued vigilance is required.”

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