All Things in Moderation

Vital Statistics:

Stocks are lower after some weaker-than-expected economic data. Bonds and MBS are flat.

First quarter GDP fell 0.3% which was lower than the 0.2% Street expectation. The decrease was attributable to a larger-than-expected increase in imports. Consumer spending and investment were additions to GDP while government spending was modestly negative and imports were a big drag.

It looks like the GDP numbers were highly influenced by tariffs: the big increase in investment was primarily attributable to inventory build, while the increase in imports (from $4.1T to $4.6T) was probably driven by businesses trying to get ahead of tariffs. Note these are annualized numbers.

The drop in government spending was primarily attributable to defense.

More evidence the labor market is softening: Private sector employment rose by 62,000 last month, according to the ADP Employment Report. “Unease is the word of the day. Employers are trying to reconcile policy and consumer uncertainty with a run of mostly positive economic data,” said Dr. Nela Richardson, chief economist, ADP. “It can be difficult to make hiring decisions in such an environment.”

We saw wages increase 4.5% on average, a slight deceleration from March. Leisure / hospitality, construction, and finance saw the biggest increases in payrolls, while education / health and IT fell.

The Street is looking for 125k private payrolls on Friday, so this report portends a miss.

Consumer confidence fell in April, according to the Conference Board. The Present Situation index was marginally lower, but the expectations index hit a 13 year low. “Consumer confidence declined for a fifth consecutive month in April, falling to levels not seen since the onset of the COVID pandemic,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “The decline was largely driven by consumers’ expectations. The three expectation components—business conditions, employment prospects, and future income—all deteriorated sharply, reflecting pervasive pessimism about the future. Notably, the share of consumers expecting fewer jobs in the next six months (32.1%) was nearly as high as in April 2009, in the middle of the Great Recession. In addition, expectations about future income prospects turned clearly negative for the first time in five years, suggesting that concerns about the economy have now spread to consumers worrying about their own personal situations. However, consumers’ views of the present have held up, containing the overall decline in the Index.”

The view of current business conditions actually improved, however consumer views of the current labor market were lower. The conference board index comports with the University of Michigan numbers. The stock market decline is certainly weighing on sentiment, as is the uncertainty over tariffs.

Job openings fell to 7.2 million in March, according to BLS. February’s number was revised downward to 7.5 million. The quits rate ticked up to 2.1%, which was flat on a year-over-year basis. Job openings shot up in the aftermath of the COVID pandemic and began to fall starting in 2022. We are now almost back to pre-pandemic levels.

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Vital Statistics:

Stocks are higher this morning after comments from Trump supported Jerome Powell and signaled lower tariffs might be ahead with China. Bonds and MBS are up.

Donald Trump soothed markets yesterday with a statement that he wasn’t planning to fire Jerome Powell. In addition, he discussed Chinese tariff levels: “that 145% tariffs on China are “very high.” “It won’t be that high,” Trump said. “It will come down substantially.” Treasury Secretary Scott Bessent also predicted a deal can be reached with China. Stocks rallied as bargain-hunters scooped up tech stocks and the 10 year bond yield fell.

The bond market reaction to Trump reminds me of James Carville and Bill Clinton in 1993 when Bill Clinton wanted to stimulate the economy but the bond market rebelled and interest rates rose. Bob Woodward’s book The Agenda characterized Bill Clinton’s reaction: ‘You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of ——- bond traders?’ he responded in a half-whisper.”

As Clinton advisor James Carville once said: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

I suspect Donald Trump may have just learned the same lesson. The bond market always bats last.

Mortgage applications fell 12.7% last week as turmoil in the bond market kept borrowers on the sidelines. Purchases fell 6.6% while refis dropped 20.7%. “Overall mortgage application activity declined last week, as rates increased to their highest level in two months. The 30-year fixed rate rose for the second straight week to 6.9 percent, an almost 30-basis-point increase over two weeks,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “These higher rates drove a 20 percent drop in refinance applications, especially for higher balance loans, with the average loan size falling substantially. The refinance share of applications at 37.3 percent was the lowest since January. Similar to the previous week, economic uncertainty and rate volatility impacted prospective homebuyers as we saw a 7 percent decline in purchase applications. Both conventional and government purchase activity fell relative to the week before, but the overall level of purchase applications was still 6 percent higher than a year ago.”

Homebuilder Pulte reported better than expected earnings of $2.57 which was a decline of 11% on an apples-to-apples basis. Revenues fell slightly, so the drop in earnings was mainly due to margin compression. “As the quarter progressed, buyers responded favorably to interest rate declines, but consumers remain caught between a strong desire for homeownership and the affordability challenges of high selling prices and monthly payments that are stretched,” added Marshall. “Given the structural shortage of housing, we remain constructive on long-term housing demand, and are adapting to the short-term impacts on consumer demand resulting from greater economic and financial uncertainty. PulteGroup’s balanced operating model, disciplined underwriting and financial strength position us well to navigate the increasingly dynamic environment and deliver value for our stakeholders.”

New orders declined about 7% on a per-unit basis as affordability challenges limited customer demand. The cancellation rate increased from 10% to 11%. Once other tidbit on the conference call about tariffs: “Our guide on gross margin assumes incentives remain elevated, at the elevated levels experienced in the first quarter. Further gross margins in the back half of the year, reflect the estimated impact of tariffs that have been imposed, which are expected to increase our house cost, by an estimated 1% of average selling price.”

FWIW, a 1% hit in ASPs is not that big of an impact. Pulte’s ASP is around $507k, so we are talking about roughly $5,000 in impact. The NAHB saw a $9,000 impact on average. Regardless, tariffs probably aren’t going to impact house prices – if anything they will probably get swallowed up in lower gross margins since the builders don’t seem to have much pricing power these days with stretched affordability. Bottom line: I don’t see tariffs moving the needle on shelter inflation.

PennyMac reported earnings yesterday. Origination volume came in at $28.9 billion, which was up 33% on a year-over-year basis. That said, production income fell as gain on sale margins compressed and fee income declined. The MSR portfolio also took a valuation hit. PFSI is valuing its current MSR portfolio at 5.3x.

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Vital Statistics:

Stocks are lower after Nvidia said it would take a $5 billion charge against earnings for licensing fees. Bonds and MBS are up.

Mortgage applications fell 8.5% last week as purchases declined 4.9% and refis fell 12.4%. “Mortgage rates moved 20 basis points higher last week, abruptly slowing the pace of mortgage application activity with refinance volume dropping 12 percent and purchase volume falling 5 percent for the week. Purchase volume remains almost 13 percent above last year’s level, but economic uncertainty and the volatility in rates is likely to make at least some prospective buyers more hesitant to move forward with a purchase,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “One notable change last week was the full percentage point increase in the ARM share. Given the jump in rates, more borrowers are opting for the lower initial rates that come with an ARM, with initial fixed rates closer to 6 percent in our survey last week. The ARM share at 9.6 percent was the highest since November 2023, and this reflects the share of units. On a dollar basis, almost a quarter of the application volume last week was for ARMs, as borrowers with larger loans are even more likely to opt for an ARM.”

Retail sales rose 1.4% MOM in March, in line with Street expectations. Ex-vehicles and gas sales rose 0.8%, better then street expectations. February sales were revised upward as well.

On an annual basis, sales rose 4.6%. Since retail sales are not adjusted for price changes, if you subtract inflation, sales rose on an inflation-adjusted basis. The big question is what is driving the increase. One interpretation is that consumers are stocking up on goods before tariff-driven price changes take effect. The other interpretation is the economy isn’t in as bad of shape as the consensus thinks.

If you believe the consumer sentiment numbers, then you would probably go with the first interpretation: desperate consumers are spending up front to beat the price increases. On the other hand, if you look at the latest jobs report, the economy isn’t as bad as feared.

The conventional wisdom is the first interpretation: “Net, net, these are simply blow out numbers on March retail sales where the rush is on like this is one gigantic clearance sale,” said Chris Rupkey, chief economist at FWDBONDS. “Consumers are expecting sharply higher prices the next year and are clearing the store shelves and picking up bargains while they can.”

We have a lot of conflicting economic data out there, so it is tough to draw a definitive conclusion about what is going on out there. I suspect there is a divergence between people who consume a lot of mainstream media and those that do not.

The Atlanta Fed’s GDP Now model is scheduled to be updated today. The current estimate (from April 9) is -2.4% growth in Q1. Given this sales number, estimate is probably low. I suspect the Atlanta Fed knows something is off with their model given that they have introduced a second GDP estimate based off of gold flows which is much less dire.

US Bank reported better-than-expected Q1 earnings of $1.03 per share, a 32% increase from a year ago. Provisions for credit losses declined on both a quarterly and annual basis. Mortgage origination volume fell 8% YOY to $6.6 billion.

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Vital Statistics:

Stocks are lower as markets continue to digest the pause in tariffs. Bonds and MBS are up.

CPI inflation fell 0.1% MOM, which was well below expectations. On a year over year basis, inflation fell 2.4%, which was below the 2.6% forecast. If you strip out food and energy, inflation rose 0.1% versus a 0.3% forecast and rose 2.8% versus a 3.0% Street expectation. In normal times, this would be a cause for stock futures to rally and bonds yields to fall, but these are not normal times.

Stocks rallied yesterday as Trump suspended some of the tariffs for 90 days in order to reach agreements with some of our trading partners who have expressed interest in making a deal. This caused a massive whipsaw in the stock market, sending the S&P 500 up almost 10% and the NASDAQ up 12%. We did not see much of a reaction in the bond market, however.

Ex Bill Clinton advisor James Carville one quipped: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

I think the bond market was the catalyst for this, not the stock market. The 10 year bond yield hit 4.5% in the Tuesday night Asian session, and that began to cause some issues in the plumbing of the bond market. There were rumors of Japanese dumping of US Treasuries overnight, although there was no corresponding movement in the US / JPY spot rate.

The Wall Street Journal had a story about another factor in the bond market rout: leveraged hedge fund bets blowing up. Hedge funds have put on positions in long Treasuries / short swaps in anticipation of a regulatory change in bank capital requirements which would increase demand for long-term Treasuries. Margin calls are forcing these funds to unwind these trades. The basis trade, where a fund buys Treasuries and shorts futures against it is another trade that is being unwound. If everyone is rushing for the exits all at once, it can create dislocations.

I think this is a pause for Trump to get some agreements with our trading partners on the page and then begin to isolate China.

Finally, we did have a good 10 year auction in the afternoon which gave players a sense of relief.

The FOMC minutes were released yesterday, although the tariff news overshadowed the release. Here were some of the highlights:

In their discussion of inflation developments, participants noted that inflation had eased significantly over the past two years but remained somewhat elevated relative to the Committee’s 2 percent longer-run goal. Some participants observed that inflation data over the first two months of this year were higher than they had expected. Among the major subcategories of prices, housing services inflation had continued to moderate, consistent with the past slowing in market rents, but inflation in core non housing services remained high, especially in nonmarket services

With regard to the outlook for inflation, participants judged that inflation was likely to be boosted this year by the effects of higher tariffs, although significant uncertainty surrounded the magnitude and persistence of such effects. Several participants noted that the announced or planned tariff increases were larger and broader than many of their business contacts had expected. Several participants also noted that their contacts were already reporting increases in costs, possibly in anticipation of rising tariffs, or that their contacts had indicated willingness to pass on to consumers higher input costs that would arise from potential tariff increases. A couple of participants highlighted factors that might limit the inflationary effects of tariffs, noting that many households had depleted the excess savings they had accumulated during the pandemic and were less likely to accept additional price increases, or that stricter immigration policies might reduce demand for rental and affordable housing and alleviate upward pressures on housing inflation. A couple of participants noted that the continued balance in the labor market suggested that labor market conditions were unlikely to be a source of inflationary pressure.

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Vital Statistics:

The manufacturing sector returned to contraction in March, according to the ISM Manufacturing Survey. “In March, U.S. manufacturing activity slipped into contraction after expanding only marginally in February. The expansion in both February and January followed 26 consecutive months of contraction. Demand and output weakened while input strengthened further, a negative for economic growth. Indications that demand weakened include: the (1) New Orders Index falling further into contraction territory, (2) New Export Orders Index dropping into contraction, (3) Backlog of Orders Index contracting at a faster rate, and (4) Customers’ Inventories Index remaining in ‘too low’ territory.

“Demand and production retreated and destaffing continued, as panelists’ companies responded to demand confusion. Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery slowdowns and manufacturing inventory growth. Forty-six percent of manufacturing gross domestic product (GDP) contracted in March, up from 24 percent in February. “

Needless to say, tariff uncertainty is causing manufacturers to be more cautious.

Job openings fell to 7.6 million in February, according to the JOLTs job openings report. Openings fell across the board on a YOY basis, although we did see construction openings increase. The quits rate was flat at 2.0%.

Construction job openings are at a 3 year low as homebuilders battle affordability issues. While tariffs aren’t necessarily helping, the driver of affordability has been the rapid rise of real estate prices driven by expansionary fiscal and monetary policy during the COVID era and higher mortgage rates. The layoff rate in construction remained extremely low at 1.8%.

New York and San Francisco are seeing increased demand for real estate, according to research from Redfin. 57% of homes in San Francisco sold over asking, and Nassau County saw a similar percentage. “The Bay Area has an unending population of people with enormous swaths of money,” said Josh Felder, a Redfin Premier real estate agent in the Bay Area. “A decade or so ago, we all thought the growth in home prices was unsustainable, but they just keep going up and up. That’s partly because there aren’t enough homes for sale, and partly because tech continues to boom despite ups and downs in the stock market and geopolitical uncertainty.”

Southern California (particularly San Diego) is seeing more homes sell below listing.

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