All Things in Moderation

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%.

Filed under: Economy |