All Things in Moderation

Vital Statistics:

Stocks are flattish this morning as earnings continue to come in. Bonds and MBS are flat.

Personal Incomes rose 0.3% MOM in December, according to the Bureau of Economic Analysis. Personal outlays (spending) rose 0.7%. The income number was in line with expectations, while spending was hotter than expected. The unexpected jump in spending makes sense given the better than expected GDP print yesterday.

The important number was the PCE Price Index, which is the inflation number that matters most to the Fed. The headline PCE Index rose 0.2% MOM as did the core rate, which excludes food and energy. Both of these were in line with expectations. On an annualized basis, the headline rate rose 2.6% YOY and the core rate rose 2.9% YOY. These were a touch below expectations, however the trends in annual inflation numbers continue to move lower.

The tame inflation numbers didn’t impact the Fed Funds futures all that much. We still see no change at the FOMC meeting next week, and March is still a toss-up.

Western Alliance reported earnings in line with estimates, however revenues were a bit light. Charge offs and provisions for loan losses increased, however it doesn’t appear that the carnage we are seeing in the commercial real estate space is hitting the bank balance sheets. Deposits grew, and WAL took advantage of it to pay down debt. The stock is down about a percent pre-open.

Mortgage origination volume was up 22% on a year-over-year basis to $10.1 billion. 90% of its origination business was purchase. Gain on sale margin expanded on a YOY basis to 30 bps. Don’t forget that mortgage rates were atrocious in October and early November, so the overall YOY growth in mortgage origination is encouraging for the mortgage business this year.

A good sign for the Spring Selling season: Pending home sales rose 8.3% in December, according to NAR. “The housing market is off to a good start this year, as consumers benefit from falling mortgage rates and stable home prices,” said Lawrence Yun, NAR chief economist. “Job additions and income growth will further help with housing affordability, but increased supply will be essential to satisfying all potential demand.”

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Vital Statistics:

Stocks are higher this morning on good earnings numbers out of market darling Netflix. Bonds and MBS are up.

Mortgage applications rose 3.7% last week as purchases increased 8% and refinances fell 7%. There was an adjustment for the Martin Luther King holiday. “Mortgage rates increased slightly last week, but there continues to be an upward trend in purchase activity. Conventional and FHA purchase applications drove most of the increase last week as some buyers moved to act early this season,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Refinance applications declined over the week and remained at low levels. There is still little incentive for homeowners to refinance with rates at these levels.”

Homebuilder D.R Horton released Q1 earnings last night that missed Street expectations. Earnings per share rose 2% YOY, while revenues rose 7%, indicating that margins are contracting. Part of the issue was a decline in gross margins, which was due to hedging costs related to the company’s use of buy-downs to incentivize homebuyers. By using buy-downs, homebuilders can “cut” the price of the home to the buyer without disturbing the comps. Headline price stays the same, but the borrower gets the price cut via a subsidized mortgage.

Orders rose 35%, but average prices are decreasing as consumers prefer lower price points. The stock was down 9.2% on the day. The homebuilders have been on a tear for the past year, so any disappointment was likely to have an outsized reaction.

The S&P Homebuilder ETF XHB was on a tear last year, rising almost 60%.

The builders are still being somewhat cautious, which is surprising given the demand out there. D.R. Horton’s single family homes under construction fell to 900 units or so at the end of the year.

Meanwhile, apartments are flooding the market, especially in the hot MSAs like Nashville, where developers are having to get quite promotional to get occupancy – i.e. 4 months of free rent. Supposedly Nashville will see 37,000 new units hit the market this year. Suffice it to say, over the past several years the US has overbuilt multi-fam and under-built SFR.

The US economy started 2024 on a strong note, according to the flash PMI. “An encouraging start to the year is indicated for the US economy by the flash PMI data, with companies reporting a marked acceleration of growth alongside a sharp cooling of inflation pressures. Output measured across both goods and services rose in January at the fastest rate since last June, growth momentum having stepped up a gear on the back of improved demand conditions. New orders inflows have now picked up for three months, buoyed in particular by improving sales to domestic customers, helping lift business confidence about the year ahead to the most optimistic since May 2022.”

Importantly, inflation was the lowest since October 2020, indicating the Fed’s tightening policy has worked. We get the all-important PCE data on Friday before the Fed meets next week.

Filed under: Economy | 22 Comments »

Vital Statistics:

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

The week ahead will have a couple of important economic prints – GDP on Thursday, and Personal Incomes / Outlays on Friday. The Personal Income / Outlay report contains the PCE Price Index, which is the Fed’s favored measure of inflation. There won’t be any Fed-speak as we are in the quiet period ahead of next week’s FOMC meeting.

The Fed Funds futures are now pricing in a better-than-50% chance that the Fed will keep rates at current levels and not cut. A month ago, it was a 80% chance of a rate cut. The December 2024 futures still envision 150 basis points in rate cuts as the most likely scenario. As inflation continues to fall, a static Fed Funds rate means that real (inflation-adjusted) rates are rising. This could be an impetus for the Fed to cut rates anyway, just to maintain the current level of monetary tightness.

Loan Depot issued an update regarding its cyber security incident from earlier this month. Approximately 16.6 million customers were impacted, and the company is working to restore normal operations. “Unfortunately, we live in a world where these types of attacks are increasingly frequent and sophisticated, and our industry has not been spared. We sincerely regret any impact to our customers,” said loanDepot CEO Frank Martell. “The entire loanDepot team has worked tirelessly throughout this incident to support our customers, our partners and each other. I am pleased by our progress in quickly bringing our systems back online and restoring normal business operations.” The stock is up pre-market, however it lost about 20% on the announcement a couple weeks ago.

The Conference Board’s Index of Leading Economic Indicators fell in December, which signals a weaker economy going forward.

“The US LEI fell slightly in December, continuing to signal underlying weakness in the US economy,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Despite the overall decline, six out of ten leading indicators made positive contributions to the LEI in December. Nonetheless, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence. As the magnitude of monthly declines has lessened, the LEI’s six-month and twelve-month growth rates have turned upward but remain negative, continuing to signal the risk of recession ahead. Overall, we expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.”

The big drivers of the the decline include the inverted yield curve, dour consumer sentiment, and the ISM indices for new orders. The positive indicators include the stock market and initial jobless claims.

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Vital Statistics:

Stocks are lower this morning as investors pare rate cut bets. Bonds and MBS are down.

Homebuilder sentiment surged in January on the back of falling interest rates, according to the NAHB / Wells Fargo Housing Market Index. “Mortgage rates have decreased by more than 110 basis points since late October per Freddie Mac, lifting the future sales expectation component in the HMI into positive territory for the first time since August,” said NAHB Chief Economist Robert Dietz. “As home building expands in 2024, the market will see growing supply-side challenges in the form of higher prices and/or shortages of lumber, lots and labor.”

Retail sales rose 0.6% MOM and 5.6% YOY in December, according to the Census Bureau. This number does not take into account inflation. For the full year 2023, retail sales rose 3.2%, which means sales actually fell when you adjust for inflation. The biggest growth was in food and drinking establishments, and that probably was driven by inflation, as evidenced by the rising prices of fast food.

Mortgage applications rose 10.4% last week as purchases increased 9.2% and refis rose 10.8%. “Mortgage rates declined across all loan types as Treasury yields moved lower last week on incoming inflation data, which helped to support a rise in mortgage applications. The 30-year fixed mortgage rate decreased six basis points to 6.75 percent, the lowest rate in three weeks,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Compared to a holiday-adjusted week, both purchase and refinance applications were up, and the increases were heavily driven by the conventional market. Although purchase activity is lagging year-ago levels, refinance applications have improved from their recent low point and have been showing year-over-year gains, albeit at low levels. If rates continue to ease, MBA is cautiously optimistic that home purchases will pick up in the coming months.”  

Federal Reserve Governor Christopher Waller said the Fed will start cutting rates this year. “As long as inflation doesn’t rebound and stay elevated, I believe the [Federal Open Market Committee] will be able to lower the target range for the federal funds rate this year,” Waller said in prepared remarks for an audience at the Brookings Institution. “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he added. “In many previous cycles … the FOMC cut rates reactively and did so quickly and often by large amounts. This cycle, however, … I see no reason to move as quickly or cut as rapidly as in the past.”

If he is referring to the pandemic rate cuts, yes, he is probably right that they won’t go to 0% over the course of 6 weeks or so. The prior rate cut cycle the Fed cut 75 basis points over the course of 4 months.

He also said that the Fed will start tapering its quantitative tightening policy this year, meaning that it will reduce the pace of shrinking its balance sheet. He expects this will only affect Treasuries, not mortgage backed securities. Given that the Fed’s holdings of MBS are way out-of-the-money, rolloff is going to be driven primarily by principal payments and housing mobility.

Industrial Production rose 0.1% MOM in December, while manufacturing production rose by the same amount. Both numbers were above expectations. November’s numbers were revised downward. Capacity Utilization was flat at 78.6%.

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Vital Statistics:

Stocks are lower after the Consumer Price Index came in hot. Bonds and MBS are down.

Prices at the consumer level rose 0.3% month-over-month and 3.4% year-over-year. This was above Street expectations. The core rate rose 0.3% month-over-month and 3.9% year-over-year. Again, these numbers were hotter than expected.

The increase in shelter accounted for about half the increase, and has been the dominant factor in the price indices for some time. Another notable increase was car insurance, which was up 20% year-over-year.

The trend is still down for the core rate on an annual basis, although the decreases are becoming becoming smaller. Like losing weight, the first few pounds are pretty easy, but the last few can be a battle.

The reaction in the Fed Funds futures was pretty muted. The markets pretty much took the Jan hike off the table, however there is still a 64% chance of a cut in March. Longer-term the futures didn’t move that much.

For the Fed, inflation may be falling at a slower rate than expected, but it is still falling. That means inflation-adjusted interest rates are increasing even though the Fed has been holding the Fed Funds rate steady. This is why the Fed can cut rates even though inflation is higher than they would like. The real Fed funds rate is the highest in 15 years.

Retailers had a decent holiday season, according to numbers from the CNBC/NRF Retail Monitor. The index, which excludes gasoline rose 0.8% in November and 0.4% in December. The core gauge, which strips out restaurant spending rose 0.2% in December and 0.7% in November. On a year-over-year basis, spending rose 3.1%.

Filed under: Economy | 35 Comments »

Vital Statistics:

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

The week ahead will be data-light, as is typical in the week after the jobs report. The most important number will be the consumer price index report on Thursday. Q4 earnings season kicks off Friday with earnings from the big banks.

Losses in commercial real estate will be a focus, especially with vacancies in office properties hitting record levels going back to the 1970s.

According to BLS, the economy created about 2.7 million jobs in 2023. The initial estimates were just over 3 million, so we had 329,000 downward revisions in payrolls throughout the year, not counting December, which we won’t get until later this year.

Home and auto insurance rates are going up and insurers are threatening to pull out of states that don’t permit them to increase rates to cover rising costs. The costs of natural disasters are going up, especially in states like California and coastal states with hurricane risk. This will have the effect of pushing up mortgage payments for those who escrow, making the affordability issue even worse. Some states like California risk becoming insurance deserts where nobody wants to do business. Note that most states have a commission which tells insurance companies how much they are permitted to charge. If the regulators drive too hard of a bargain, the insurance companies can choose to stop doing business in those states.

Asking rents declined0.8% YOY in December, according to data from Redfin. “High supply—more so than low demand—is driving rent declines. But if mortgage rates continue to drop at a fast clip in 2024, slowing rental demand could become a major driver of rent declines,” said Redfin Economics Research Lead Chen Zhao. “That’s because more Americans would ditch the rental market to become homeowners, leaving landlords with even more vacancies.”

Vacancy rates are climbing back after their post pandemic lows. The US has a record number of multi-family units under construction, so more supply is on the way.

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Vital Statistics:

Stocks are flattish this morning after suffering a couple tough days to open the year. Bonds and MBS are down.

The FOMC minutes indicated that the Fed isn’t quite yet worried about flagging economic growth. Their main focus continues to be inflation, not growth. That said, they do see it appropriate to move the Fed Funds rate lower towards the end of the year.

Participants judged that the current stance of monetary policy was restrictive and appeared to be restraining economic activity and inflation. In light of the policy restraint in place, along with more favorable data on inflation, participants generally viewed risks to inflation and employment as moving toward greater balance. However, participants remained highly attentive to inflation risks…In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves…In their submitted projections, almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024. Participants also noted, however, that their outlooks were associated with an unusually elevated degree of uncertainty and that it was possible that the economy could evolve in a manner that would make further increases in the target range appropriate. 

In terms of inflation, they generally view the supply chain issues to have been worked out. They see shelter inflation working its way lower as rents continue to weaken. Services inflation less shelter, which is largely driven by wage inflation is still elevated.

The Fed Funds futures have begun to take down the probability of a rate cut at the March FOMC meeting. A week ago, we were looking at a 86% chance of a rate cut, while we are now looking at 71% chance.

Bond market volatility has yet to meaningfully work its way lower, which is keeping mortgage spreads elevated. That said, we are starting to see MBS spreads tighten a touch. We are nowhere back to pre-tightening levels however spreads are still close to historical records. We could easily see 125 basis points in lower rates if spreads revert to long-term historical levels. That would imply mortgage rates in the low 5% level even without lower 10 year yields.

The economy added 164,000 jobs in December, according to the ADP Employment Report. “We’re returning to a labor market that’s very much aligned with pre-pandemic hiring,” said Nela Richardson, chief economist, ADP. “While wages didn’t drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared.”

Leisure / Hospitality led the increase in jobs, adding 59,000 which was followed by education / health services at 42,000 and construction at 24,000. This number is a touch higher than the Street expectation for payrolls in tomorrow’s Employment Situation Report.

Wage growth continued to decelerate, rising 5.4% for job stayers and 8% for job changers. The deceleration started over a year ago.

Announced job cuts fell to 34,817 in December, according to outplacement firm Challenger, Gray and Christmas. “Layoffs have begun to level off, and hiring has remained steady as we end 2023. That said, labor costs are high. Employers are still extremely cautious and in cost-cutting mode heading into 2024, so the hiring process will likely slow for many job seekers and cuts will continue in Q1, though at a slower pace,” said Andy Challenger, workplace and labor expert and Senior Vice President of Challenger, Gray & Christmas, Inc.

In 2023, tech companies announced the most job cuts (probably as the era of free money disappeared). Retail was next. Health care and financial industries also announced a lot of cuts in 2023.

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Vital Statistics:

Stocks are lower as we begin 2024. Bonds and MBS are down.

Happy new year. Here’s hoping 2024 begins the rebound in the mortgage business.

The upcoming short week will be dominated by the jobs report, however we will also get the FOMC minutes from the December meeting. On Friday, we will get the ISM Manufacturing Index as well.

There is a Groundhog Day feeling to the beginning of the year, with people calling for a recession after the Fed’s rate hikes. So far, the optimists have been right, and that has been primarily due to the unexpected resilience of the US labor market, especially at the lower wage end.

In early 2024, the full lagged effects of the 2022-2023 rate hiking cycle will be fully felt. Historically, a 525 basis point tightening regime would have caused a severe recession, but perhaps the sheer unprecedented amount of fiscal stimulation during the pandemic years and beyond was able to soften the blow.

Theoretically the Fed should focus solely on inflation and unemployment, however theory and practice don’t always mix. I discussed the politics of the moment and what it means for the Fed in my latest Substack.

US manufacturing weakened in December, according to the S&P Purchasing Managers Index. “US manufacturers ended the year on a sour note, according to S&P Global’s PMI survey. Output fell at the fastest rate for six months as the recent order book decline intensified. Manufacturing will therefore likely have acted as a drag on the economy in the fourth quarter. The slowdown is spreading to the labor market. Payrolls were cut for a third month running as increasing numbers of firms grew concerned about the development of excess operating capacity. The fourth quarter has consequently seen factories reduce employment at a pace not seen since 2009 barring only the early pandemic lockdown months.

Apartment rental rates are expected to continue to soften in 2024. Rents rose about 20% between 2021 and 2022, however they were flattish in 2023. We currently have a record number of multi-family units under construction, so rental growth should continue to be flat to negative. Most of these units are expected to open in the next 12 months, so we will have a deluge of new units, especially in markets like Nashville, Austin, Dallas and Atlanta.

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