All Things in Moderation

Vital Statistics:

Stocks are higher as earnings continue to come in. Bonds and MBS are down.

Global bond yields shot higher overnight after the Bank of Japan tweaked the language in its policy statement which hinted at policy normalization. This caused the yield on the Japanese Government Bond to shoot higher by 11 basis points (from 0.44% to 0.55%) which caused global bond yields to spike higher. As a general rule, global government bonds do correlate with each other, so this pushed yields higher.

Personal Incomes rose 0.3% month-over-month in June, according to BEA. Personal consumption rose 0.5%. The PCE Price Index, which is the Fed’s preferred measure of inflation, rose 0.2% month-over-month and 3% year-over-year. Excluding food and energy, it rose 0.2% MOM and 4.1% YOY.

Here is the long-term chart of the annual change in the PCE Price Index excluding food and energy, which is the focus for the Fed:

Lower energy prices (they fell 19% YOY) pushed down the headline number to 3%, but the ex-food and energy number is still elevated. June 2022 was the peak of the housing market, and that will help to push down the monthly numbers going forward. The next Fed meeting in September 19-20, so we will have a lot of data to chew through before that meeting.

The employment cost index rose 1% in the quarter ending June 30, and 4.5% for the past 12 months. It rose at 5.1% for the year ending in June 2022, so we are seeing wage growth decelerate.

Pennymac reported that volumes rose 9% to $24.9 billion in Q2. This was down 7% on a YOY basis. Overall margins improved, but elevated interest rate volatility pushed up hedging costs.

Consumer sentiment improved markedly in July, according to the University of Michigan. “Consumer sentiment rose for the second straight month, soaring 11% above June and reaching its most favorable reading since October 2021. All components of the index improved considerably, led by a 18% surge in long-term business conditions and 14% increase in short-run business conditions. Overall, the sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets.”

Year-ahead inflationary expectations increased from 3.3% to 3.4%. Long-term inflationary expectations were stuck at 3%.

Filed under: Economy | 16 Comments »

Vital Statistics:

Stocks are higher this morning on Meta earnings. Bonds and MBS are down.

As expected, the Fed hiked the Fed Funds rate by 25 basis points yesterday. The statement itself was relatively anodyne – investors hoping for a signal the Fed is done with rate hikes were disappointed. During the press conference, the business press probed over whether this was the last rate hike, and Powell remained steadfast in his data-determinant viewpoint. The Fed Funds futures see a 22% chance of another hike in September and a 30% chance of another 25 by the end of the year. They see the first rate cut in March of 24.

Separately, the ECB hiked by 25 bp this morning.

Gross domestic product rose 2.4% in the second quarter, according to the BEA. This was way higher than expectations – the Street was looking for 1.5%. Consumption and corporate spending were the big additions to GDP while residential construction was a drag.

Inventory build was a big driver in the GDP number. After the supply chain issues of the pandemic, inventories were drawn down and GDP growth was supported by businesses rebuilding inventory. It looks like we are back at pre-pandemic levels, if you look at inventory versus sales. This tailwind looks played out.

The best news in the report was the continued downward pressure on prices. The PCE Price Index increased 2.6% compared to 4.1% in the first quarter. Excluding food and energy, the PCE Price Index rose 3.8% compared to 4.9% in the first quarter.

New York Community Bank reported earnings that beat the street this morning. The company continues to digest Signature. The company didn’t give a lot of info on the mortgage business, however gain on sale fell and the company reported a 154% increase in multi-fam delinquencies. I am not sure if this is all Signature, but single-fam DQs were more or less flat.

Tri-Pointe Homes reported earnings this morning. The builders are benefiting from a scarcity of existing homes for sale. This is due to the lock-in effect, where potential sellers are staying put because of sticker shock on new mortgage rates, aka “hate the house but love the mortgage.” This is pushing buyers towards new construction. The press release said that new homes are currently 33% of inventory compared to 13%, which is the historical norm. They also mentioned that “consumers have adjusted to mid-six to low-seven percent interest rates, setting a new normal in the market.”

Pending Home Sales rose modestly in May, according to NAR. “The recovery has not taken place, but the housing recession is over,” said NAR Chief Economist Lawrence Yun, “The presence of multiple offers implies that housing demand is not being satisfied due to lack of supply. Homebuilders are ramping up production and hiring workers…With consumer price inflation calming close to the Federal Reserve’s desired conditions, mortgage rates look to have topped out…Given the ongoing job additions, any meaningful decline in mortgage rates could lead to a rush of buyers later in the year and into the next.”

NAR sees the mortgage rate averaging 6.4% this year and falling to 6% in 2024.

Filed under: Economy | Leave a comment »

Vital Statistics;

Stocks are lower as we await the Fed decision at 2:00 pm today. Bonds and MBS are up small.

New home sales fell 2.5% month-over-month to 697k. This was below Street expectations of 727k. This was up 23.8% on a year-over-year basis. The median sales price fell 4% on a YOY basis to $415,400.

Pulte reported second quarter earnings yesterday. Revenues rose on a combination of a modest increase in units and average sales prices. Pulte focuses on first-time, move-up and active adult buyers, which means it doesn’t play in the luxury sandbox. Gross margins increased on a sequential basis and the cancellation rate was only 9%.

Pulte said on the conference call that the supply of existing homes for sale will probably remain limited as long as mortgage rates are above 5% as many would-be sellers are balking at selling their current home and buying another with a 7% rate. Consumer demand remains strong, and new construction will benefit from this effect.

On the earnings call, the company was asked about the high gross margins, and it said that it is changing the way it is allocating incentive money. Previously, the company might have used upgrades to entice buyers, however today it is using incentives to buy down the mortgage rate. The company said that 5.5% is sort of the “sweet spot” for buyers. This implies that the gross margin of 30% is somewhat overstated since the company is eating that buydown cost in the lower price it gets for the mortgage.

Pacwest and Banc of California agreed to merge, which put some starch in the regional banks. The combined company will get a capital injection from private equity which will enable the banks to sell some of their underwater MBS. The net effect will be to make the combined assets smaller.

Western Alliance has been on a tear recently, and it looks like it has put the crisis pretty much behind it.

Mortgage applications fell 1.8% last week as purchases decreased 3% and refis fell 0.4%. Refis are down 30% on a YOY basis. “Mortgage rates were essentially flat last week but remained high, with the 30-year fixed rate staying at 6.87 percent and contributing to a pullback in mortgage applications,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 2.5 percent decline in purchase activity, partly driven by a 10 percent decrease in FHA applications, pushed the purchase index to its lowest level in over a month. The decrease in FHA purchase applications contributed to an increase in the overall average purchase loan size to $432,700, its highest level since the end of this May. Refinance applications remained lackluster, running 30 percent behind year-ago levels. Many borrowers remain on the sidelines given current rates and persistent affordability challenges.”

Filed under: Economy | 14 Comments »

Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.

Consumer confidence improved in July, according to the Conference Board. “Consumer confidence rose in July 2023 to its highest level since July 2021, reflecting pops in both current conditions and expectations,” said Dana Peterson, Chief Economist at The Conference Board. “Headline confidence appears to have broken out of the sideways trend that prevailed for much of the last year. Greater confidence was evident across all age groups, and among both consumers earning incomes less than $50,000 and those making more than $100,000.”

The present situation index (meaning how things actually are at the moment) is approaching pre-pandemic levels, however the expectations index remains depressed.

Home prices rose 0.7% month-over-month and 2.8% year-over-year according to the FHFA House Price Index. “U.S. house prices increased moderately in May, continuing the trend of the last few months,” said
Dr. Nataliya Polkovnichenko, Supervisory Economist in FHFA’s Division of Research and Statistics. “However, house prices in some regions of the country remained below the levels seen one year ago.”

The deceleration in home price appreciation is massive compared to a year ago:

The Case-Shiller Index rose 0.7% MOM but fell 0.5% on a YOY basis. “The ongoing recovery in home prices is broadly based. Before seasonal adjustment, prices rose in all 20 cities in May (as they had also done in March and April). Seasonally adjusted data showed rising prices in 19 cities in May, repeating April’s performance. (The outlier is Phoenix, down 0.1% in both months.) On a trailing 12-month basis, the National Composite is 0.5% below its May 2022 level, with the 10- and 20-City Composites also negative on a year-over-year basis….Home prices in the U.S. began to fall after June 2022, and May’s data bolster the case that the final month of the decline was January 2023. Granted, the last four months’ price gains could be truncated by increases in mortgage rates or by general economic weakness. But the breadth and strength of May’s report are consistent with an optimistic view of future months.”

The report referred to the current situation as the “Revenge of the Rust Belt” with MSAs like Cleveland coming in as top performers, along with New York and Chicago. Meanwhile the high-flyers of the pandemic – the West Coast and the Mountain states are giving back some of their gains.

Freddie Mac’s latest outlook predicts that the second half of 2023 won’t bring much relief to mortgage originators as refi activity will remain virtually non-existent and high rates keep people from selling their homes. They note an interesting phenomenon, where existing home sales are falling while new home sales are increasing.

You can see the massive drop in new listings compared to the pre-pandemic years:

Freddie sees a recovery in originations in 2024 as people get used to the new normal of higher rates.

Filed under: Economy | 6 Comments »

Vital Statistics:

Stocks are up as we enter Fed Week. Bonds and MBS are up as well.

The upcoming week will be dominated by the FOMC meeting on Tuesday and Wednesday, however we will have a lot of data as well. We will get house price data on Tuesday, the FOMC decision on Wednesday, GDP on Thursday, and the PCE inflation index on Friday.

The Chicago Fed National Activity Index remained in negative territory last month, with most indicators suggesting a national slowdown. The CFNAI is sort of a meta-index that tracks some 85 economic indicators.

It is pretty remarkable to think that after 500 basis points of tightening, the economy is still as strong as it is. I talked about it my latest substack piece: Where is the recession we were promised? The answer is that we are somewhere between ludicrous speed and ridiculous speed.

Rithm Capital (aka New Rez) agreed to buy Sculptor, an asset manager with $34 billion in assets under management. It looks like a bolt-on acquisition for Rithm, as Sculptor’s current management will run the company. Sculptor gets access to more permanent capital, and I guess Rithm gets to diversify into non-mortgage related businesses which will help smooth the insane cyclicality of the mortgage business. Note that AGNC Investment and Rithm Capital are the only mortgage REITs that haven’t cut their dividends in response to the Fed’s tightening policy.

The economy expanded modestly in July, according to the Flash Composite PMI.

“July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation. The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter. That’s down from a 2% pace signaled by the survey in the second quarter. However, growth is being entirely driven by the service sector, and in particular rising spend from international clients, which is helping offset a becalmed manufacturing sector and increasingly subdued demand from US households and businesses. Furthermore, business optimism about the year-ahead outlook has deteriorated sharply to the lowest seen so far this year. The darkening picture adds downside risks to output growth in the coming months which, alongside the slowing in the pace of expansion in July, will keep alive fear that the US economy may yet succumb to another downturn before the year is out. The stickiness of price pressures meanwhile remains a major concern. As the survey index of selling prices has acted as a reliable leading indicator of consumer price inflation, anticipating the easing to 3% in June, it sends a worrying signal that further falls in the rate of inflation below 3% may prove elusive in the near term.”

Filed under: Economy | 7 Comments »

Vital Statistics

Stocks are lower this morning after disappointing numbers out of Netflix and Tesla. Bonds and MBS are down.

Bank earnings continue to come in. Truist reported numbers this morning. Mortgage banking origination rose 38% QOQ to $5.6B. They were down 53% on a year-over-year basis. Fifth Third reported originations rose 21% to $1.7B, but still fell 60% on a YOY basis. On the plus side, gain on sale increased to 1.71% compared to 1.21% in Q1 and 0.85% a year ago.

Existing Home Sales fell 3.3% in June, according to NAR. “The first half of the year was a downer for sure with sales lower by 23%,” said NAR Chief Economist Lawrence Yun. “Fewer Americans were on the move despite the usual life-changing circumstances. The pent-up demand will surely be realized soon, especially if mortgage rates and inventory move favorably. There are simply not enough homes for sale….The market can easily absorb a doubling of inventory….Home sales fell but home prices have held firm in most parts of the country,” Yun said. “The national median home price in June was slightly less than the record high of nearly $414,000 in June of last year. Limited supply is still leading to multiple-offer situations, with one-third of homes getting sold above the list price in the latest month.”

Days on market rose to 18 from 14 a year ago, while all-cash buyers accounted for 26% of sales. Investor activity increased to 18%. The first time homebuyer was 27%.

The Index of Leading Economic Indicators fell again in June, according to the Conference Board. “The US LEI fell again in June, fueled by gloomier consumer expectations, weaker new orders, an increased number of initial claims for unemployment, and a reduction in housing construction,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The Leading Index has been in decline for fifteen months—the longest streak of consecutive decreases since 2007-08, during the runup to the Great Recession. Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the US economy is likely to be in recession from Q3 2023 to Q1 2024. Elevated prices, tighter monetary policy, harder-to-get credit, and reduced government spending are poised to dampen economic growth further.”

The components pulling down the LEI include the ISM New Orders Index, the inverted yield curve, and consumer sentiment. Consumer sentiment is a squishy indicator, which is often driven heavily by gasoline prices. The ISM New Orders Index maybe has more rigor but it is still one of these diffusion indices without a lot of quantitative meat on the bones. Ever since QE began the shape of the yield curve has been driven by central bank policy, so IMO the information contained in that has been limited at best. Maybe we get a recession, but with the strength of the labor market, I can’t imagine a deep one, if we get one at all.

Bernstein sees equities providing bond-like returns over the next decade. They plot the rolling 10 year return of equities going back almost 150 years. We “take a step back by 100 years or so to get some perspective on the prospect of likely future equity and bond returns over the next decade,” strategists Sarah McCarthy and Mark Diver wrote in a note. “US Equities have delivered 12% annualized total return over the last decade Not bad, but not that unusual,” they said. “While the 2000s were a largely lost decade for equities, the period from the mid-80s to late 90s had a consistent higher 10-year rolling return, in the region of 15%. The 50s and early 60s were similar.”

My gut feeling looking at that chart is that aside from special cases like the tech bubble, long-term interest rate trends are the driver. Long periods of low interest rates are a positive catalyst for stock returns, while rising rates are a negative.

It is easy to forget how long interest rate cycles are. Bonds were in a long term bull market starting during the Great Depression and lasting into the 1960s. Bonds began a secular bear market starting in the 1960s and ending in the early 1980s. The long secular bull market in bonds began in the early 80s and ended last year. Are we in for a 20 or 30 year bear market in bonds? If inflation is a permanent part of the landscape maybe we are.

Filed under: Economy | 24 Comments »

Vital Statistics:

Stocks are flattish this morning as earnings season begins in earnest. Bonds and MBS are up.

Retail Sales rose 0.2% MOM in June, which was well below the Street consensus. On a year-over-year basis, they rose 1.5%. This number is not adjusted for inflation, and gasoline was a big driver of the decline. Consumers are spending money on health care products and restaurants. Consumption will probably begin to struggle as we approach the resumption of student loan payments in October.

Manufacturing took a step back in June, according to the Fed. Industrial production fell 0.5%, while manufacturing production fell 0.3%. May’s numbers were revised lower. Capacity Utilization fell to 78.9% which is more or less at the historical average.

Bank of America reported better-than-expected earnings this morning. Mortgage origination volume rose to $5.9 billion compared to $3.9 in Q1. This was still well below last year’s volume of $14.5 billion in Q222. Home Equity originations were flat YOY at $2.5 billion.

Delinquencies in the consumer book increased, however they are still below pre-pandemic levels. Commercial Real Estate provisions increased as well.

Homebuilder confidence improved one point in July, according to the NAHB Housing Market Index.

“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” said NAHB Chief Economist Robert Dietz.

Given that shelter inflation accounts for roughly 40% of the Consumer Price Index, Dietz added the best way to ease this largest source of inflationary pressure is to build additional for-rent and for-sale housing. “There’s been some commentary linking gains for housing construction with increased concerns for additional inflation, but this has the economics backwards,” he said. “More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and developing lots.” 

Filed under: Economy | 11 Comments »

Vital Statistics:

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

The upcoming week won’t have much in the way of market-moving data, however we will get a lot of housing data, with the NAHB Housing Market Index, housing starts, and existing home sales. We won’t have any Fed-speak as we are in the quiet period ahead of next week’s FOMC meeting. Earnings season begins in earnest with most of the banks reporting.

ICE and Black Knight have agreed to sell Optimal Blue to Constellation Software in an effort to get regulatory approval for their merger. Constellation Software is already buying Empower, and will purchase OB for $700 million paid for in $200 MM cash and a $500MM promissory note

Morgan Stanley is out with a call saying they expect yields to work their way lower. “We maintain a bullish stance on government bond duration and expect yields to trend lower. Stubbornly hawkish central bank rhetoric remains the biggest impediment to a larger bond market rally, but could provide dip-buying opportunities in preparation for a rhetorical policy pivot,” Morgan Stanley stated. PIMCO is out with a similar call, saying the bond market offers “equity-like” potential with bond market volatility.

Speaking of bond market volatility, we are seeing bond market volatility fall to the bottom of the range associated with the current Fed tightening policy. Falling bond market volatility will go a long way towards reducing MBS spreads which will help push down mortgage rates.

The Empire State Manufacturing Index expanded last month, although optimism remains subdued. Price pressures continue to abate, which is good news for the Fed.

Filed under: Economy | 3 Comments »

Vital Statistics:

Stocks are higher this morning after a benign producer price index report. Bonds and MBS are up.

The Producer Price Index (a measure of inflation at the wholesale level) came in lower than expected; another sign that inflation continues to moderate. Final demand prices rose 0.1% month-over-month and 0.1% on a year-over-year basis. If you strip out food, energy and trade services the index rose 2.6% on a year-over-year basis. The flat YOY growth is due to commodity prices.

The index for final demand services rose 0.2% MOM and 2.3% YOY. Final demand services has a lot to do with wage inflation and that is what the Fed is most concerned about.

This report probably doesn’t move the needle for the Fed’s decision for the July meeting, but it is an indication that they have largely achieved their goal of reining in inflation.

The Fed released its Beige Book yesterday, which is a survey of all the regional Fed districts. Overall economic growth is increasing modestly, however consumer spending was mixed, with more being spent on travel and less on discretionary goods. Demand for real estate remains strong, albeit constrained with limited inventory. The Fed noted that the labor market is coming more in balance:

Employment increased modestly this period, with most Districts experiencing some job growth. Labor demand remained healthy, though some contacts reported that hiring was getting more targeted and selective. Employers continued to have difficulty finding workers, particularly in health care, transportation, and hospitality, and for high-skilled positions in general. However, many Districts reported that labor availability had improved and that some employers were having an easier time hiring than they were having previously. Employers also reported that the unusually high turnover rates in recent years appear to be returning to pre-pandemic norms. Wages continued to rise, but more moderately. Contacts in multiple Districts reported that wage increases were returning to or nearing pre-pandemic levels.

This is another good sign for the Fed. Separately, initial jobless claims remain low at 237,000.

Since the beginning of the week, we have seen a particularly robust rally in bonds, with the 10 year shedding 26 basis points in yield, while the 2 year has lost 30 basis points. Shares in mortgage banks have improved as well, with United Wholesale and Rocket up 16% since last Friday. The XHB homebuilder ETF is up 6.5% as well, while the S&P is up about 2% over the same period. The Fed Funds futures still see a 25 basis point hike at the June meeting, but are taking down the chance for any more hikes this year.

Filed under: Economy | 8 Comments »

ital Statistics:

Stocks are higher this morning after the Consumer Price Index came in weaker than expected. Bonds and MBS are up on the benign CPI print and the fact that China cut interest rates overnight.

The consumer price index rose 0.2% MOM in June, according to the BLS. On an annual basis, prices rose 3%. If you strip out food and energy, prices rose 0.2% MOM and 4.8% YOY. Shelter was the biggest contributor to the index, accounting for 70% of the increase, while energy was the biggest drag. Shelter rose 7.8% year-over-year. Home prices peaked in June of 2022, so the YOY increases will go flat starting with next month’s report.

The report didn’t have much of an impact on the July Fed Funds futures, which still see a 92% chance of another 25 basis points. All of the Fed-speak seems to indicate that the central bank will hike rates next week.

We are still elevated compared to the past 10 years, but are returning to normal

Mortgage Applications increased 0.9% last week as purchases increased 2% and refis fell 1%. “Incoming economic data continue to send mixed signals about the economy, with the overall impact leaving Treasury yields higher last week as markets expect that the Federal Reserve will need to hold rates higher for longer to slow inflation. All mortgage rates in our survey followed suit, with the 30-year fixed rate increasing to 7.07 percent, the highest level since November 2022,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The jumbo rate also increased to 7.04 percent, a record high for the jumbo series, which dates back to 2011. Purchase applications increased, but remained at a very low level and are 26 percent lower than the same week last year. The rise in purchase activity was driven by increases in both FHA and VA purchase applications. The refinance index dropped to its lowest level since early June, as demand for rate/term and cash-out refinances remains extremely low with mortgage rates over 7 percent.”

Mortgage credit availability increased in June, according to the MBA. “Mortgage credit availability was essentially unchanged in June, remaining close to the lowest level since early 2013, as the industry continues to operate at reduced capacity,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Lenders are streamlining their operations by offering fewer loan programs, with some exiting certain channels. Data from our Weekly Applications Survey indicated that June mortgage applications were more than 30 percent lower than a year ago and at the slowest pace since December 2022.”

Filed under: Economy | Leave a comment »