All Things in Moderation

Vital Statistics:

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

Housing starts rose 15% MOM and 9% YOY to a seasonally-adjusted annual rate of 1.56 million units. Building Permits rose 2.5% MOM to 1.46 million. This was below last year.

Multi-unit (5+) under construction remains near record levels. This should help put downward pressure on rents and ultimately inflation. I am not sure where these multi-family units are being built, but there will be a deluge of units hitting the markets.

Mortgage Capital Trading (MCT) announced that lock volume fell 10.7% in November, as MBS rallied early in the month. Volume tailed off around the end of the month due to the Thanksgiving Day holiday.  Andrew Rhodes, Senior Director and Head of Trading at MCT, commented on the current scenario, saying, “While we’ve seen a decrease in mortgage rates from the highs which would alleviate the seasonal dip, we are still struggling with low supply and see that as a continued trend through the beginning of 2024.”

Morgan Stanley has put out its 10 surprises for 2024. Here are the highlights (I omitted the ones which are about overseas markets)

Surprise 1: The elusive US hard landing arrives in style. Looking forward to 2024, the potential major surprise could be the arrival of the elusive hard landing, catching most investors off guard just after they concluded that “this time was indeed different.” While it took the better part of the previous year for the consensus to fully embrace the soft landing narrative, the reversal to a hard landing may happen more swiftly, leading investors to regret being misled once again

Surprise 2: Fed cuts 8 times, amid soft landing: Looking forward to 2024, the potential major surprise could be the arrival of the elusive hard landing, catching most investors off guard just after they concluded that “this time was indeed different.” While it took the better part of the previous year for the consensus to fully embrace the soft landing narrative, the reversal to a hard landing may happen more swiftly, leading investors to regret being misled once again

Surprise 3: QT ends before the first cut: Looking forward to 2024, the potential major surprise could be the arrival of the elusive hard landing, catching most investors off guard just after they concluded that “this time was indeed different.” While it took the better part of the previous year for the consensus to fully embrace the soft landing narrative, the reversal to a hard landing may happen more swiftly, leading investors to regret being misled once again

Surprise 10: Breakevens revert to 2019 levels: Looking forward to 2024, the potential major surprise could be the arrival of the elusive hard landing, catching most investors off guard just after they concluded that “this time was indeed different.” While it took the better part of the previous year for the consensus to fully embrace the soft landing narrative, the reversal to a hard landing may happen more swiftly, leading investors to regret being misled once again.

Student loan payments resumed in October, and only 60% of them were made, according to the government. That is a pretty hefty percentage of delinquencies, and suggests that some of the spending that has been going on is unsustainable.

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Vital Statistics:

We have green on the screen as investors rejoice over the FOMC statement. Bonds and MBS are up.

As expected, the Fed maintained interest rates at current levels, and signaled the tightening cycle is finished. Bonds and MBS are up, with the 10 year bond yield trading below 4%.

As expected, the Fed maintained the Fed Funds rate at current levels, and pointed out that the economy is slowing:

Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks

The dot plot showed the Fed expects the 2024 Fed Funds rate to be in a range of 4.5% – 4.75%, which is a sizeable drop from the September forecast of 5% – 5.25%. Note that 2025 and 2026 have been revised lower as well.

2024 GDP forecasts were trimmed from 1.5% to 1.4%, while the unemployment rate is expected to remain at 4.1%. PCE inflation estimates were lowered a hair to 2.4% on both the headline and the core rate.

The reaction in the bond market was dramatic, with the 10 year bond yield falling 15 basis points on the day and the 2 year falling 25 bps. The stock market also took off as investors bet on a soft landing.

The press conference more or less re-iterated the info from the statement, however Powell did signal that this tightening cycle is over:

While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate. We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.

When asked about why the Fed is stopping before inflation hits 2%, Powell said that waiting for inflation to hit the target before easing would mean overshooting.

The Fed Funds futures became even more dovish, with the central tendency predicting six rate cuts in 2024. Check out the difference in probabilities between yesterday and a month ago. Amazing.

This statement should be good news for the mortgage space overall, as it will be supportive for MBS spreads. Volatility in the bond market should dissipate as uncertainty over Fed policy ends. The big agency mortgage REITs spiked 5% on the Fed announcement. Mortgage originators also rose, with Rocket rising 9.5% and United Wholesale rising 7.5%. Interestingly, Mr Cooper (which is a big MSR play) only rose 2.4%.

Bottom line: 2024 might be a bit better for the mortgage space than people thought a couple months ago. I suspect the MBA will be taking up estimates for 2024 soon.

In other economic news, retail sales rose 0.3% month-over-month topping expectations, while initial jobless claims fell to 202k. Cue the chorus calling for a Goldilocks-esque soft landing.

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Vital Statistics:

Stocks are lower this morning after the Consumer Price Index report. Bonds and MBS are down.

The Consumer Price Index came in slightly above expectations, rising 0.1% on a month-over-month basis. The Street was looking for a 0% increase. The core rate, which excludes food and energy, rose 0.3%, in line with expectations. Falling energy prices helped offset increases in shelter and the index for used cars. The majority of the increase (70%) in the core rate was driven by shelter.

The report probably doesn’t move the needle for the FOMC meeting, which starts today. The expectation is that the Fed will maintain rates at current levels, however a lot of attention will be focused on the dot plot and economic projections within the report.

The Fed Funds futures are now roughly a 60 / 40 bet against a rate cut in March.

The CFPB is suing Wells Fargo and other banks over pricing concessions. The practice of concessions to save a deal has been going on forever in mortgage banking, but the regulators would like to end the practice entirely. “As long as pricing exceptions exist, pricing disparities exist,” said Ken Perry, founder of a Washington-based compliance firm for the mortgage industry. “They’re the easiest way to discriminate against a client.”

Small Business Optimism decreased 0.1% in November, according to the NFIB. Like many non-governmental economic reports, the NFIB Small Business Optimism index doesn’t comport with the official narrative of 5%+ growth in Q3. Optimism remained well below the long-term all year, while a net 17% of firms reported sales declines. Inventory boost might have boosted Q3 numbers, but the lack of follow-through in sales makes it look like Q4 might be weak. The number of firms raising prices fell again to a net positive 25%, which is below the peak of 60% earlier this year.

The Senate has introduced legislation which would ban hedge funds from owning single-family rentals. The report is concerned that 577,000 homes in the US are owned by institutional investors. Of course there are 144 million homes in the US, so as a percent, this isn’t much. It certainly isn’t enough to affect the market.

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Vital Statistics:

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

Companies announced 45,510 job cuts in November, according to the Challenger, Gray and Christmas Job Cut Report. This is a 24% increase from October, but is down 41% from a year ago. Year-to-date, job cut announcements are up 11% compared to a year ago.

“The job market is loosening, and employers are not as quick to hire. The labor market appears to be stabilizing with a more normal churn, though we expect to continue to see layoffs going into the New Year,” said Andrew Challenger, labor expert and Senior Vice President of Challenger, Gray & Christmas, Inc.

Tech is the biggest sector cutting jobs, followed by retailers and healthcare. Year-to-date, hiring plans are the lowest since 2015, and seasonal hiring is the lowest in 10 years.

This year has been been the least affordable for housing on record, but it looks like 2024 will be better, according to Redfin. The typical homebuyer earning the median income would have to spend 41% of their income on housing costs to buy the median home. Blame a combination of rising home prices in 2021 and 2022 along with soaring mortgage rates.

“A perfect storm of inflation, high prices, soaring mortgage rates and low housing supply caused 2023 to go down as the least affordable year for housing in recent history,” said Redfin Senior Economist Elijah de la Campa. “The good news is that affordability is already improving heading into the new year. Mortgage rates are coming down, more people are listing homes for sale, and there are still plenty of sidelined buyers ready to take a bite of the fresh inventory. We expect these conditions to continue to improve in 2024.”

The share of median income varies widely by MSA, with California cities like San Francisco requiring 85%, and Midwest cities like Detroit requiring only 18%.

Initial Jobless claims ticked up 1,000 to 220k. On an unadjusted basis they rose by 94k to 294k. It appears that the job market is really a tale of two markets: white collar jobs, where hiring is sluggish and skilled labor where there is still a shortage of workers.

Blackstone Mortgage Trust (BXMT) is a mortgage REIT that focuses on commercial mortgage backed securities and can be seen as kind of a proxy for the problems in commercial real estate. One big short seller is targeting the stock as credit losses are looking to be picking up. As this stock goes, so goes the pain in the banking sector and possible rate cuts.

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Vital Statistics:

Stocks are lower after Moody’s cut China’s debt outlook. Bonds and MBS are up.

Job openings fell to 8.7 million in October, according to the JOLTS report. This was well below Street expectations of 9.4 million. The job openings rate fell to 5.3%, which is down 0.3% MOM and 1.1% YOY. The quits rate was flat at 2.3%.

Job openings fell in health care / social assistance and finance.

Despite the drop in job openings, the ISM Services index expanded at a faster rate in November. “The services sector had a slight uptick in growth in November, attributed to the increase in business activity and slight employment growth. Respondents’ comments vary by both company and industry. There is continuing concern about inflation, interest rates and geopolitical events. Rising labor costs and labor constraints remain employment-related challenges.”

Tappable equity has returned to close to its 2022 peak, according to data from Black Knight. “Despite the resurgence in tappable equity among U.S. mortgage holders, elevated interest rates are making homeowners reluctant to extract that wealth,” Walden said. “Indeed, in recent quarters, equity withdrawal rates have been running at less than half their long-run averages. Mortgage holders extracted a mere 0.41% of tappable equity available at the beginning of Q3. That’s some 55% below the average withdrawal rate seen in the 12 years leading up to the Fed’s most recent tightening cycle. That’s equivalent to $54 billion – $250B over the last 18 months – in ‘missing’ withdrawals that might have otherwise stimulated the broader economy.”

The large amount of equity in homes is also contributing to the low delinquency rate, as troubled borrowers often have 20% equity in their homes and can simply sell the property and move on.

Filed under: Economy | 41 Comments »

Vital statistics:

Stocks are lower this morning as we await two speeches from Jerome Powell. Bonds and MBS are down.

Nick Timaros of the WSJ (one of the journalists most plugged in to what the Fed is thinking) says that the hiking cycle is probably over, however the Fed is reluctant to say so. They are even more reluctant to discuss any sort of rate cuts. The fear is that declaring victory too early while the economy is growing and the labor market is tight risks a credibility issue if inflation resurges.

That said, Fed Governor Waller discussed how the Fed could start cutting rates yesterday, saying that as inflation falls, the real rate of interest increases even if the Fed Funds rate stays the same. You can see that in the chart below, which subtracts the annual CPI from the Fed Funds rate.

Right now, the real Fed Funds rate is the highest it has been since 2007, which means monetary policy is pretty restrictive. In March of 2022, the real rate of interest was -8.3%, which is a record. Prior negative rate lows were -4.8% in 1980 and -5% in 1975.

The December Fed Funds futures are pricing in a 0% chance for a rate hike. The March Fed Funds futures are now close to a 50-50 chance for a 25 basis point rate cut.

The US manufacturing sector contracted again in November, according to the ISM Manufacturing Index. “The U.S. manufacturing sector continued to contract at the same rate in November as compared to October, again posting a reading of 46.7 percent. Companies are still managing outputs appropriately as order softness continues.”

“Demand remains soft, and production execution is slightly down compared to October as panelists’ companies continue to manage outputs, material inputs and — more aggressively — labor costs. Suppliers continue to have capacity. Sixty-five percent of manufacturing gross domestic product (GDP) contracted in November, down from 75 percent in October. More importantly, the share of sector GDP registering a composite PMI^® calculation at or below 45 percent — a good barometer of overall manufacturing weakness — was 54 percent in November, compared to 35 percent in October and 6 percent in September. Three of the top six industries by contribution to manufacturing GDP were at or below 45 percent, same as the previous month,” says Fiore.

One of the respondents said the economy is “slowing dramatically.”

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Vital Statistics:

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

House prices rose 0.6% in September, according to the FHFA House Price Index. On an annualized basis, they grew 5.5%. “U.S. house price growth continued to accelerate in the third quarter, appreciating more than in each of the previous four quarters,” said Dr. Anju Vajja, Principal Associate Director in FHFA’s Division of Research and Statistics. “House prices rose in the third quarter in all census divisions and are higher than one year ago, driven primarily by a low supply of homes for sale.”

Applying the 5.5% (actually 5.45%) increase gives us an expected conforming loan limit for 2024 of $765,800. FHFA should make the official announcement in the next week or so.

Home prices rose 2.5 MOM, according to the Case-Shiller Home Price Index, setting a new record. “On a year-to-date basis, the National Composite has risen 6.1%, which is well above the median full calendar year increase in more than 35 years of data. Although this year’s increase in mortgage rates has surely suppressed the quantity of homes sold, the relative shortage of inventory for sale has been a solid support for prices. Unless higher rates or exogenous events lead to general economic weakness, the breadth and strength of this month’s report are consistent with an optimistic view of future results.”

The rally in the bond market has caused the yield curve to steepen its inversion. The 10 year minus the 3 month is -110 basis points, which is less inverted than last spring, but it is a signal that the soft landing / no landing narrative of early fall is fading.

We are starting to see some more casualties in the real estate space. Unicorn real estate company Veev, a maker of modular homes, is reportedly closing up shop. The company had raised $600 million in total, but was unable to raise any more and cannot service the current debt nor can it move the merchandise.

Consumer confidence improved in November, according to the Conference Board. “Assessments of the present situation ticked down in November, driven by less optimistic views on current job availability, which outweighed slightly improved views on the state of business conditions. More consumers said that business conditions were ‘good’ compared to last month, but more also said they were ‘bad.’ Regarding the employment situation, more consumers said that jobs were ‘plentiful’ compared to October, but the number saying jobs were ‘hard to get’ also increased. By contrast, when asked to assess their current family financial conditions (a measure not included in calculating the Present Situation Index), the share reporting ‘good’ rose, and those citing ‘bad’ fell, suggesting consumer finances remain healthy heading into the holiday season.”

Inflationary expectations ticked down from 5.9% to 5.7%, which is a lot higher than U-Mich and breakeven inflation rates in the TIPS market.

There has been a lot of chatter about what to make of the big decline in median new home prices. The median new home price fell 18% compared to a year ago. Does this mean that homebuilders are cutting prices to move the merchandise? And if so, does this portend a big decline in home prices overall?

First of all, median home prices are not necessarily comparable on a year-over-year basis. If a builder sells a bunch of McMansions in one year, and then sells a bunch of starter homes in the next year, the median price is going to fall, but that is due to a change in the product mix, not necessarily market weakness.

There were 439,000 new homes for sale at the end of October, which represents 7.8 months worth of inventory. Historically, 7.8 months represents an oversupplied market, but the overall supply / demand balance in the US is skewed towards undersupply, not oversupply.

The wild card is prices are falling in the previously hot West Coast and Sun Belt markets, and there probably is some localized price cutting happening. Think places like Phoenix, Las Vegas, Austin. That said, if builders were aggressively cutting prices, it would show up in lower gross margins, and that isn’t happening.

So do I think the decline in median new home prices signals overall home price weakness going forward? No.

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Vital Statistics:

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

Markets will close early today, and liquidity should be sparse.

European Central Bank President Christine Lagarde said the ECB can take a pause and observe. “We have already done a lot,” Lagarde said. “Given the amount of ammunition we have used, we can observe very attentively the components of our lives like salaries, profits, like fiscal, like geopolitical developments and certainly the way in which our ammunition is impacting our economic life to decide how long we have to stay there and what decision we have to make”

The national mortgage delinquency rate fell 3 basis points to 3.26%, according to the Black Knight Mortgage Monitor. Active foreclosure inventory rose to 217k, which is well below pre-pandemic levels. Prepays fell to 0.43%.

More evidence that the economy is slowing: The S&P Flash PMI showed the economy barely expanding, with employment falling. US companies cut workers for the first time since June 2020.

“The US private sector remained in expansionary territory in November, as firms signalled another marginal rise in business activity. Moreover, demand conditions – largely driven by the service sector – improved as new orders returned to growth for the first time in four months. The upturn was historically subdued, however, amid challenges securing orders as customers remained
concerned about global economic uncertainty, muted demand and high interest rates. Business uncertainty was also heightened among US firms, as expectations regarding the year-ahead outlook slipped to the weakest since July.

“Businesses cut employment for the first time in almost three-and a-half years in response to concerns about the outlook. Job shedding has spread beyond the manufacturing sector, as services firms signalled a renewed drop in staff in November as cost savings were sought.

“On a more positive note, input price inflation softened again, with cost burdens rising at the slowest rate in over three years. The impact of hikes in oil prices appear to be dissipating in the manufacturing sector, where the rate of cost inflation slowed notably. Although ticking up slightly, selling price inflation remained subdued relative to the average over the last three years and was consistent with a rate of increase close to the Fed’s 2% target.”

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Vital Statistics:

Stocks are higher this morning after good numbers out of Nvidia. Bonds and MBS are flat.

The FOMC minutes showed that the Fed is not considering rate cuts. “Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two sided. But with inflation still well above the Committee’slonger-run goal and the labor market remaining tight, most participants continued to see upside risks to inflation.” Note that this meeting took place before the weak CPI number which showed Fed progress on inflation.

The minutes did mention the problems in commercial real estate, which are going to impact bank earnings as provisions for credit losses increase. A lot of CRE loans need to be rolled over next year and many of these projects cannot be refinanced unless LPs put up more capital. If the LPs refuse, the real estate goes to the banks.

Mortgage applications rose 3% last week as purchases increased 4% and refis rose 2%. “U.S. bond yields continued to move lower as incoming data signaled a softer economy and more signs of cooling inflation. Most mortgage rates in our survey decreased, with the 30-year fixed mortgage rate decreasing to 7.41 percent, the lowest rate in two months,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Mortgage applications increased to their highest level in six weeks, but remain at very low levels. Purchase applications were up almost four percent over the week, on a seasonally adjusted basis, as both conventional and government purchase loans saw increases. The average loan size on a purchase application was $403,600, the lowest since January 2023. This is consistent with other sources of home sales data showing a gradually increasing first-time homebuyer share.”

Consumer sentiment fell in November, according to the University of Michigan Consumer Sentiment Survey. Expectations about future conditions remain dour. Unfortunately, consumer expectations for inflation rose again, with consumers seeing year-ahead inflation coming in at 4.5%, which was the highest since April. Long-run expectations rose to 3.2%, the highest since 2011. We know the Fed pays close attention to the inflationary expectations number.

Durable goods orders fell 5.4% in October, according to the Census Bureau. Transportation drove the decrease. If you strip out transportation, durable goods orders were flat. Capital goods orders (a proxy for business capital expenditures) fell 0.1%. All of the durable goods numbers came in below expectations. Separately, Initial Jobless Claims fell to 209k.

Filed under: Economy | 19 Comments »

Vital Statistics:

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

Housing starts rose 1.9% MOM to a seasonally adjusted annual rate of 1.37 million. This was still down 4.2% on a YOY basis. Building Permits rose 1.1% MOM to 1.49 million. The mix of housing starts continues to shift from multi-family to single family. There is a glut of apartments under construction and multifamily commercial real estate is becoming an issue.

The National Association of Realtors reports that listings are increasing as mortgage rates fall. The rate “lock-in” effect, which basically says that people are unwilling to move when that means trading a 3.5% mortgage for a 8% mortgage, appears to be easing. Median listing prices are holding up, although it sounds like some of the Western markets which rocketed during the pandemic are seeing a lot of price cuts without homes moving.

NAR Chief Economist Lawrence Yun forecasts that existing home sales will rise 15% in 2024 as mortgage rates fall into the 6% – 7% range by the Spring Selling Season. Based on normal MBS spreads, a 4.4% 10-year should translate into a 6.4% mortgage rate. “The 10-year Treasury yield is at 4.4%, which historically means mortgage rates could be at 6.4%, but they are much higher,” said Yun. “The bond market is forcing the Fed to pivot.”

Ultimately the rate lock-in effect will dissipate as real life intrudes. “Pent-up sellers cannot wait any longer. People will begin to say, ‘life goes on,'” said Yun. “Listings will steadily show up, and new home sales will continue to do well. Existing home sales will rise by 15% next year.”

The Wall Street Journal has a piece this morning on how foreign demand for Treasuries has dissipated. Much of it has to do with foreigners selling Treasuries in order to prop up their own currencies (China in particular). However, there was an interesting note in the piece: China is swapping out its Treasuries for MBS.

“At the same time, China has diversified reserves away from Treasurys and has been investing in bonds backed by U.S. government agencies such as Freddie Mac that offer higher yields than Treasurys. China has bought a net $32 billion of those in the year through August, according to data from the Council on Foreign Relations. “

If this catches on, increased appetite for agency debt, along with a decline in bond market volatility could be the catalyst for decreasing MBS spreads, at long last.

Personal interest payments continue to rise. Hard to see how consumer spending can be sustained in the context of this, especially as the COVID payment suspensions go away.

Interestingly WalMart’s CEO warned of deflation on the earnings conference call yesterday. Haven’t heard that word bandied about in a while – deflation is generally a credit event, not a monetary one – but if retailers are cutting prices to move excess inventory that should be a good sign for inflation.

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