All Things in Moderation

Vital Statistics:

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

Third quarter GDP rose 2.8% in the second revision to the estimate. This was in line with Street expectations.

New Home Sales disappointed again, coming in at 610,000, which was well below the Street expectation of 725k. This was down 17.3% compared to September and down 9% compared to a year ago.

The median home price was $437,300, and the average price was $585,800. There was 9.5 months’ worth of supply.

The FOMC minutes were released yesterday. On the subject of inflation, the members sounded pretty confident:

With regard to the outlook for inflation, participants indicated that they remained confident that inflation was moving sustainably toward 2 percent, although a couple noted the possibility that the process could take longer than previously expected. A few participants remarked that insofar as recent robust increases in real GDP reflected favorable supply developments, the strength of economic activity was unlikely to be a source of upward inflation pressures. Participants cited various factors likely to put continuing downward pressure on inflation, including waning business pricing
power, the Committee’s still-restrictive monetary policy stance, and well-anchored longer-term inflation expectations. Several participants noted that nominal wage growth had continued to move down and that the wage premium available to job switchers had diminished. In addition, some participants observed that, with supply and demand in the labor market being roughly in balance and in light of recent productivity gains, wage increases were unlikely to be a source of inflationary pressure in the near future.

Further into the minutes, they discussed that the economy has been stronger than expected, and that downside risks to the economy had become less prominent. The Fed Funds futures see a 66% chance of a 25 basis point cut at the next meeting in mid-December.

Mortgage applications rose 6.3% last week, as purchases rose 12% and refis fell 3%. “Purchase activity drove overall applications higher last week, as conventional purchase applications picked up pace and mortgage rates declined for the first time in over two months, with the 30-year fixed rate dropping slightly to 6.86 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. With the growth in for-sale inventory and signs that the economy remains strong, buyers have remained in the market even though rates have increased recently. The increase in conventional purchase applications helped push the average purchase loan size to $439,200, its highest level in almost a month. The decline in refinance activity was driven by pullbacks in FHA and VA refinances. Applications were significantly higher than a year ago by most measures, but this was compared to the week of Thanksgiving 2023, which was a week earlier than this year’s holiday.”

The new FHFA limits are out, rising 5.2% to $806,500. The high balance limit (for expensive MSAs) is 150% of that or $1,209,750.

Consumer confidence improved in November, according to the Conference Board. “Consumer confidence continued to improve in November and reached the top of the range that has prevailed over the past two years,” said Dana M. Peterson, Chief Economist at The Conference Board. “November’s increase was mainly driven by more positive consumer assessments of the present situation, particularly regarding the labor market. Compared to October, consumers were also substantially more optimistic about future job availability, which reached its highest level in almost three years. Meanwhile, consumers’ expectations about future business conditions were unchanged and they were slightly less positive about future income.”

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Filed under: Economy | 31 Comments »

Vital Statistics:

Stocks are lower this morning on Ukraine / Russia fears. Bonds and MBS are up.

Housing starts fell to 1.311 million units in October, according to the Census Bureau. This is down 4% on a year-over-year basis. Building permits fell 7.7% on a YOY basis to 1.534 million units.

Homebuilder confidence improved in November as political uncertainty abated. “With the elections now in the rearview mirror, builders are expressing increasing confidence that Republicans gaining all the levers of power in Washington will result in significant regulatory relief for the industry that will lead to the construction of more homes and apartments,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan. “This is reflected in a huge jump in builder sales expectations over the next six months.”

“While builder confidence is improving, the industry still faces many headwinds such as an ongoing shortage of labor and buildable lots along with elevated building material prices,” said NAHB Chief Economist Robert Dietz. “Moreover, while the stock market cheered the election result, the bond market has concerns, as indicated by a rise for long-term interest rates. There is also policy uncertainty in front of the business sector and housing market as the executive branch changes hands.”

Nomura is out with a call saying that the Fed will not cut rates at the December FOMC meeting. Their argument is that the election of Trump will be inflationary due to tariffs, which will prevent the Fed from easing further. The bank sees the Fed skipping the December meeting and then cutting in May and June of 2025 by 25 basis points. After that, they see the Fed holding rates there.

FWIW, I doubt the Fed is letting policy speculation drive its decision-making. Inflation continues to fall towards the Fed’s 2% target, and policy remains restrictive.

Filed under: Economy | 83 Comments »

Vital Statistics:

Stocks are higher this morning despite a pick up in inflation. Bonds and MBS are down.

The headline consumer price index rose 0.2% MOM in October, according to the BLS. Shelter rose 0.4% and accounted for half the increase. Energy was flat after a big decline in September.

On a year-over-year basis, the headline CPI rose 2.6%. If you strip out food and energy, the CPI rose 0.3% month over month and 3.3% YOY.

I graphed the CPI shelter index (blue line) versus the FHFA House Price Index (red line). You can see that the FHFA house price index leads the CPI shelter index, and FHFA’s house price growth is returning to pre-2020 levels. This should drag down the shelter component of CPI and return inflation back to pre-pandemic levels.

Mortgage applications increased 0.5% last week as purchases rose 2% and refis fell 2%. “Mortgage rates continued to increase last week, driven by higher Treasury yields as financial markets digested the likely impacts of a Trump presidency. The Federal Reserve’s 25-basis-point rate cut was already anticipated and did little to move the markets,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed rate was at 6.86 percent last week, its highest since July 2024. However, despite the increase in rates, applications increased for the first time in seven weeks.”

Added Kan, “Purchase applications picked up and remained close to levels from a year ago. FHA and VA purchase applications drove the stronger overall purchase activity, increasing 3 percent and 9 percent, respectively. FHA mortgage rates bucked the overall trend and were lower over the week, which likely helped some borrowers. Conventional purchase applications were also up slightly. Meanwhile, the upward climb in rates led to refinance activity falling to its lowest level since May 2024.”  

Filed under: Economy | 99 Comments »

Vital Statistics:

Stocks are higher this morning as markets digest the Trump victory. Bonds, on the other hand, are getting slammed.

The Trump trade is full swing, with stocks rising in anticipation of a more business-friendly environment. The action in bonds is probably to be expected, as investors adopt a risk-on position. Overall, Trump will probably be negative for long-term bonds for a few reasons. First, the risk-on aspect means that investors will prefer riskier assets like stocks to safe assets like bonds. Second, stronger economic activity will give the Fed less leeway to cut rates. And finally, hawkish trade policy is bad for Treasuries. The reason for this is that our trading partners run trade surpluses, which means they send us goods and services and we send them Treasuries in return. If trade declines, that means less demand for Treasuries and therefore higher rates at the margin.

All attention now turns to the Fed, which starts its meeting today. Longer-term, it will be interesting to see what happens to the GSEs.

The services economy expanded for the fourth consecutive month, according to the ISM Services Index. “The increase in the Services PMI^® in October was driven by boosts of more than 4 percentage points for both the Employment and Supplier Deliveries indexes. The Business Activity and New Orders indexes both dropped by at least 2 percentage points. Each of the four subindexes are now above their averages for 2024. The Supplier Deliveries Index remained in expansion in October, indicating slower delivery performance. Concerns over political uncertainty were again more prevalent than the previous month. Impacts from hurricanes and ports labor turbulence were mentioned frequently, although several panelists mentioned that the longshoremen’s strike had less of an impact than feared due to its short duration.”

Mortgage applications fell 10.8% last week as purchases 5.1% and refis fell 18.5%. “Applications decreased for the sixth consecutive week, with purchase activity falling to its lowest level since mid-August and refinance activity declining to the lowest level since May. The average loan size on a refinance application dropped below $300,000, as borrowers with larger loans tend to be more sensitive to any given changes in mortgage rates”

Filed under: Economy | 70 Comments »