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 | 20 Comments »

Vital Statistics:

Stocks are lower after the Consumer Price Index came in hot. Bonds and MBS are down.

Prices at the consumer level rose 0.3% month-over-month and 3.4% year-over-year. This was above Street expectations. The core rate rose 0.3% month-over-month and 3.9% year-over-year. Again, these numbers were hotter than expected.

The increase in shelter accounted for about half the increase, and has been the dominant factor in the price indices for some time. Another notable increase was car insurance, which was up 20% year-over-year.

The trend is still down for the core rate on an annual basis, although the decreases are becoming becoming smaller. Like losing weight, the first few pounds are pretty easy, but the last few can be a battle.

The reaction in the Fed Funds futures was pretty muted. The markets pretty much took the Jan hike off the table, however there is still a 64% chance of a cut in March. Longer-term the futures didn’t move that much.

For the Fed, inflation may be falling at a slower rate than expected, but it is still falling. That means inflation-adjusted interest rates are increasing even though the Fed has been holding the Fed Funds rate steady. This is why the Fed can cut rates even though inflation is higher than they would like. The real Fed funds rate is the highest in 15 years.

Retailers had a decent holiday season, according to numbers from the CNBC/NRF Retail Monitor. The index, which excludes gasoline rose 0.8% in November and 0.4% in December. The core gauge, which strips out restaurant spending rose 0.2% in December and 0.7% in November. On a year-over-year basis, spending rose 3.1%.

Filed under: Economy | 35 Comments »

Vital Statistics:

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

The week ahead will be data-light, as is typical in the week after the jobs report. The most important number will be the consumer price index report on Thursday. Q4 earnings season kicks off Friday with earnings from the big banks.

Losses in commercial real estate will be a focus, especially with vacancies in office properties hitting record levels going back to the 1970s.

According to BLS, the economy created about 2.7 million jobs in 2023. The initial estimates were just over 3 million, so we had 329,000 downward revisions in payrolls throughout the year, not counting December, which we won’t get until later this year.

Home and auto insurance rates are going up and insurers are threatening to pull out of states that don’t permit them to increase rates to cover rising costs. The costs of natural disasters are going up, especially in states like California and coastal states with hurricane risk. This will have the effect of pushing up mortgage payments for those who escrow, making the affordability issue even worse. Some states like California risk becoming insurance deserts where nobody wants to do business. Note that most states have a commission which tells insurance companies how much they are permitted to charge. If the regulators drive too hard of a bargain, the insurance companies can choose to stop doing business in those states.

Asking rents declined0.8% YOY in December, according to data from Redfin. “High supply—more so than low demand—is driving rent declines. But if mortgage rates continue to drop at a fast clip in 2024, slowing rental demand could become a major driver of rent declines,” said Redfin Economics Research Lead Chen Zhao. “That’s because more Americans would ditch the rental market to become homeowners, leaving landlords with even more vacancies.”

Vacancy rates are climbing back after their post pandemic lows. The US has a record number of multi-family units under construction, so more supply is on the way.

Filed under: Economy | 17 Comments »

Vital Statistics:

Stocks are flattish this morning after suffering a couple tough days to open the year. Bonds and MBS are down.

The FOMC minutes indicated that the Fed isn’t quite yet worried about flagging economic growth. Their main focus continues to be inflation, not growth. That said, they do see it appropriate to move the Fed Funds rate lower towards the end of the year.

Participants judged that the current stance of monetary policy was restrictive and appeared to be restraining economic activity and inflation. In light of the policy restraint in place, along with more favorable data on inflation, participants generally viewed risks to inflation and employment as moving toward greater balance. However, participants remained highly attentive to inflation risks…In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves…In their submitted projections, almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024. Participants also noted, however, that their outlooks were associated with an unusually elevated degree of uncertainty and that it was possible that the economy could evolve in a manner that would make further increases in the target range appropriate. 

In terms of inflation, they generally view the supply chain issues to have been worked out. They see shelter inflation working its way lower as rents continue to weaken. Services inflation less shelter, which is largely driven by wage inflation is still elevated.

The Fed Funds futures have begun to take down the probability of a rate cut at the March FOMC meeting. A week ago, we were looking at a 86% chance of a rate cut, while we are now looking at 71% chance.

Bond market volatility has yet to meaningfully work its way lower, which is keeping mortgage spreads elevated. That said, we are starting to see MBS spreads tighten a touch. We are nowhere back to pre-tightening levels however spreads are still close to historical records. We could easily see 125 basis points in lower rates if spreads revert to long-term historical levels. That would imply mortgage rates in the low 5% level even without lower 10 year yields.

The economy added 164,000 jobs in December, according to the ADP Employment Report. “We’re returning to a labor market that’s very much aligned with pre-pandemic hiring,” said Nela Richardson, chief economist, ADP. “While wages didn’t drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared.”

Leisure / Hospitality led the increase in jobs, adding 59,000 which was followed by education / health services at 42,000 and construction at 24,000. This number is a touch higher than the Street expectation for payrolls in tomorrow’s Employment Situation Report.

Wage growth continued to decelerate, rising 5.4% for job stayers and 8% for job changers. The deceleration started over a year ago.

Announced job cuts fell to 34,817 in December, according to outplacement firm Challenger, Gray and Christmas. “Layoffs have begun to level off, and hiring has remained steady as we end 2023. That said, labor costs are high. Employers are still extremely cautious and in cost-cutting mode heading into 2024, so the hiring process will likely slow for many job seekers and cuts will continue in Q1, though at a slower pace,” said Andy Challenger, workplace and labor expert and Senior Vice President of Challenger, Gray & Christmas, Inc.

In 2023, tech companies announced the most job cuts (probably as the era of free money disappeared). Retail was next. Health care and financial industries also announced a lot of cuts in 2023.

Filed under: Economy | 34 Comments »

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.

Filed under: Economy | 26 Comments »

Vital Statistics:

Stocks are higher this morning after inflation numbers came in better than expected. Bonds and MBS are down small. Given that this is the Friday before a long Christmas weekend, trading volumes should be razor-thin.

Personal Income rose 0.4% MOM in November, an increase of 0.1% compared to October and September. This was bang in line with Street expectations. Consumption rose 0.2%, which was shy of expectations.

Importantly, the PCE Price index (the Fed’s preferred measure of inflation) fell 0.1% in November and was up 2.6% on a year-over-year basis. Both numbers were below expectations. The core rate, which excludes food and energy rose 0.1% month-over-month and 3.2% year-over-year. Both core numbers were below expectations.

You can see in the chart below, we are about 2/3 of the way there in getting core inflation back to the Fed’s goal:

The bond market didn’t react to the numbers much but given how much rates have fallen already that probably shouldn’t be a surprise.

New home sales fell 12.2% MOM to a seasonally-adjusted annual rate of 590,000. This was up on a year-over-year basis however. The median new home price fell about 6% to $434,700.

The S&P SPDR Homebuilder ETF has been on a tear since the 10 year peaked in late October.

Durable good orders rose 5.4% month-over-month, which was better-than-expected. Core capital goods (a proxy for business capital investment) rose 0.8%, which was again better than than expected.

Title Company First American Financial suffered a cyberattack and shut down its website, imperiling mortgage transactions in progress. “First American has experienced a cybersecurity incident. In response, we have taken certain systems offline and are working to return to normal business operations as soon as possible.”

Freddie Mac is out with their outlook for 2024. They see economic growth cooling from 2023’s pace, which should cause unemployment to tick up. Mortgage rates are expected to be in the 6% – 7% range during the year, while home prices are expected to rise 6.3%. Despite inflation remaining above the Fed’s 2% target, they think the Fed will start cutting rates.

For-sale inventory is expected to remain depressed, and the company sees a modest uptick in dollar volume for purchase originations while refinancing activity will remain moribund.

Filed under: Economy | 28 Comments »

Vital Statistics:

Stocks are higher this morning as global sovereign yields continue to fall. Bonds and MBS are up.

Global sovereign yields are lower after good inflation data in the UK. The UK Gilt is down 12 basis points, while German Bunds are trading back below 2%. The end-of-year bond rally globally has been impressive.

Mortgage Applications fell 1.5% last week as purchases fell 1% and refis fell 2%. On an annual basis, purchase activity was down 18% while refi activity was up 18%. “With the positive news about the drop in inflation, and the FOMC projections proclaiming a pivot towards rate cuts, the 30-year fixed mortgage rate reached its lowest level since June 2023, declining to 6.83 percent,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “At least as of last week, borrowers’ response to this rate move was rather tepid. VA refinance applications jumped 18 percent for the week, but otherwise, both refinance and purchase applications showed small declines.”

Refinance activity rose to almost 40% of total applications, while the average mortgage rate fell from 7.07% to 6.83%.

Consumer confidence increased in December, according to the Conference Board. “December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months,” said Dana Peterson, Chief Economist at The Conference Board. “While December’s renewed optimism was seen across all ages and household income levels, the gains were largest among householders aged 35-54 and households with income levels of $125,000 and above. December’s write-in responses revealed the top issue affecting consumers remains rising prices in general, while politics, interest rates, and global conflicts all saw downticks as top concerns. Consumers’ Perceived Likelihood of a US Recession over the Next 12 Months abated in December to the lowest level seen this year—though two-thirds still perceive a downturn is possible in 2024.”

These consumer confidence indices are highly influenced by gasoline prices, which have been falling. There also remains a sizeable gap between expectations and present conditions (i.e. now). In other words, people’s economic situation at the moment is better than they think the future will be.

Existing Home sales rose 0.8% in November, ending a 5 month decline. Sales rose to a seasonally-adjusted annual pace of 3.82 million units, which is still 7.3% lower than a year ago. This number reflects the fact that mortgage rates spiked in September and October.

“The latest weakness in existing home sales still reflects the buyer bidding process in most of October when mortgage rates were at a two-decade high before the actual closings in November,” said NAR Chief Economist Lawrence Yun. “A marked turn can be expected as mortgage rates have plunged in recent weeks.”

Inventory remains light, with only 3.5 month’s worth at the current pace. This is a function of high mortgage rates and the lock-in effect. As rates move lower, this issue should become less of a concern. The median home price rose 4% YOY to $387.600. The first time homebuyer share rose to 31% from 28% a month before.

US economic bellwether FedEx is down 10% this morning after posting weak earnings and guidance. The company said it expects declining revenues this year after guiding for a flat top line. “In the remainder of [fiscal] 2024, we expect revenue will continue to be pressured by volatile macroeconomic conditions, negatively affecting customer demand for our services across our transportation companies,” FedEx said in a filing. Its fiscal year ends May 31.

This doesn’t bode well for consumption or investment going forward.

Filed under: Economy | 11 Comments »

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.

Filed under: Economy | 21 Comments »

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.

Filed under: Economy | 46 Comments »

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.

Filed under: Economy | 23 Comments »