Morning Report: Happy New Year

Posted on January 2, 2024 by Brent Nyitray

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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