All Things in Moderation

Vital Statistics:

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

Mortgage applications fell 5% as purchases and refis fell by the same amount. “Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates. Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed mortgage rate decreased to 7.21 percent last week, but rates remained more than a full percentage point higher than a year ago, despite mixed data on the health of the economy and signs of a cooling job market. The refinance index dropped to its lowest level since January 2023, driven by a 6 percent decline in conventional refinances.”

Widening MBS spreads aren’t helping things, as the difference between the 30 year fixed rate and the 10 year (which is a decent enough proxy for MBS spreads) is sitting at close to record levels. The chart below goes back to 1990. Know what sticks out to me? The era of QE. Did QE make that big of a difference in MBS spreads? It is debatable. So if QE didn’t affect things all that much than why would people fret so much about QT?

It looks like there is a mean reversion element to MBS spreads, which means this too shall pass.

The services economy slowed sharply in August according to the S&P Services PMI. The index fell from 52.5 to 50.5, which means the services economy is more or less static. Note the manufacturing economy has been in contraction for almost a year.

“The survey data send a hint of rising stagflation risks, as stubborn price pressures are accompanied by a near-stalling of business activity. The PMI numbers for the third quarter so far point to a faltering of economic growth after a robust second quarter, as a renewed manufacturing downturn is accompanied by a deteriorating picture in the service sector.”

The ISM Services PMI paints a brighter picture, showing the services economy expanded in August. New orders, employment, and activity all increased. That said, we saw a big jump in inventories and a big decrease in backlog, which suggests slower growth ahead. Pricing pressures increased again based on higher energy and transportation costs.

Student loan repayments are about to resume, and that should have a negative impact on services.

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ital Statistics:

Stocks are higher this morning after a weaker-than-expected jobs report. Bonds and MBS are up.

The economy added 187,000 jobs in August, which was a touch above Street expectations. The unemployment rate rose from 3.5% to 3.8%, which was the surprise of the report. The number of unemployed people also increased by 514,000 while the number of people employed rose by 222,000.

The size of the labor force also increased, rising by 736,000 which will help bring supply and demand more into balance. This pushed up the labor force participation rate to 62.8%. Average hourly earnings rose less than expected, increasing 0.2% on a month-over-month basis and 4.2% on a year-over-year basis.

This is obviously good news for the bond market, as it shows the Fed’s tightening is gaining traction in the labor market. This should hopefully take some of the pressure off the Fed to keep hiking rates and give them the confidence to let the hikes that have already happened do the job.

Unfortunately, Loretta Mester interrupted the party in the bond market by acknowledging the increase in unemployment, but stressing that inflation is still too high. “In the labor market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong,” Mester said in a speech text, adding “job growth has slowed and job openings are down, but the unemployment rate is low, at 3.8%.” So these comments mean she already knew the numbers in the report.

Apartment asking rents turned negative for the first time since the pandemic began, according to Apartment List. Rents fell 1.2% on a year-over-year basis. A massive shortage of apartment units drove rent increases in 2021 and 2022 and this has spurred a lot of apartment construction, which is coming on line now. Note we have a record number of units in 5+ buildings under construction at the moment. The vacancy rate for apartment units sits at 6.4%, which is slightly above pre-pandemic levels.

The manufacturing economy improved in August, but remains in contraction territory. “The U.S. manufacturing sector shrank again, but the uptick in the PMI^® indicates a slower rate of contraction. The August composite index reading reflects companies managing outputs appropriately as order softness continues, but the month-over-month increase is a sign of improvement. Demand remains soft, but production execution is consistent with new, reduced output levels based on panelists’ companies order books. Suppliers continue to have capacity. Prices are generally stable.”

Construction spending rose 0.7% MOM, while private residential construction rose 1.4%. We are starting to see a divergence in single family versus multi. Single family rose 2.8% MOM but is down 15.2% on a YOY basis. Meanwhile multi-fam rose only 0.2% but is up 24.6% YOY. With a potential glut of new apartments coming onto the market, the focus is turning to single-family construction.

Note that Warren Buffett bought stakes in three homebuilders recently.

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Vital Statistics:

Stocks are higher after key inflation data came in as expected. Bonds and MBS are flat.

Personal Incomes rose 0.2% in July, while spending rose 0.8%. The PCE Price Index (the Fed’s preferred measure of inflation) rose 0.2% month-over-month and 3.3% year-over-year. Excluding food an energy, the index rose 0.2% MOM and 4.2% YOY. The YOY numbers are an uptick from June, however that month was unusually low. Bonds are positive despite the increase.

Country Garden, China’s biggest property developer, reported a loss of $7 billion for the first half of the year and warned of an imminent default. Country Garden has already missed payments on several bond issues and is in the grace period.

Like the subprime crisis in 2008, the conventional wisdom is that this will be contained and there won’t be any systemic risk to the financial system. Country Garden’s losses are comparable to Lehman’s in 2008, so this isn’t a small event. Granted, China’s economy is more closed than most, however it is naive to me to think that there won’t be any pain in the West when the world’s second largest economy experiences a burst real estate bubble.

Real Estate is about 30% of China’s GDP. In the US, it is about 16%. Japan in about 12%. If China’s real estate percentage falls to normal worldwide levels, it will cause a mid-teens contraction in GDP. To put that into perspective, US GDP dropped by 15% between 1929 and 1932.

Announced job cuts soared 267% year-over-year, according to outplacement firm Challenger, Gray and Christmas. A big portion of this was due to the bankruptcy of Yellow, the trucking company.

“Job openings are falling, and American workers are more reluctant to leave their positions right now. The job market is resetting after the pandemic and post-pandemic hiring frenzy,” said Andrew Challenger, labor expert and Senior Vice President of Challenger, Gray & Christmas, Inc. “The increase in job cuts is not surprising as technological disruption and companies taking a cost savings approach on the economy claim positions,” he added.

Hiring plans are the lowest since 2016. Year-to-date, companies have announced plans to hire 135,980 workers, which is a 83% drop compared to 2022.

Home prices set a new high, according to the Black Knight Home Price Index. Prices rose 2.3% on an annual basis, according to the index. Some of this is due to seasonal factors, and prices should start showing bigger YOY increases. That said, affordability issues will probably cap growth rates.

Atlanta Fed Chairman Ralph Bostic said that the Fed should probably hold tight and not continue rate hikes in a speech overnight in South Africa: “You no doubt saw that the Committee voted last month to raise the federal funds rate another 25 basis points, to a level of 5 1/4 to 5 1/2 percent. Based on current dynamics in the macroeconomy, I feel policy is appropriately restrictive. I think we should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.”

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Vital Statistics:

Stocks are flat this morning after some weaker-than-expected economic data. Bonds and MBS are up.

Second quarter GDP was revised downward to 2.1% from 2.4%. Consumption was flat at 1.7%. The PCE Price Index was revised downward as well, with the headline number falling to 2.5% and the core number (ex-food and energy) falling to 3.7%.

Residential Construction continued to be a drag on GDP, extending its streak to 9 consecutive quarters. Given the action in the homebuilders, perhaps this is finally about to change, at long last.

The private sector added 177,000 jobs in August, according to the ADP Employment Report. This was below the consensus estimate of 200,000, and a touch higher than the 170,000 estimated in Friday’s jobs report. “This month’s numbers are consistent with the pace of job creation before the pandemic. After two years of exceptional gains tied to the recovery, we’re moving toward more sustainable growth in pay and employment as the economic effects of the pandemic recede.”

Most of the additions were in services, with trade / transportation and education / health leading the way. Leisure / hospitality increased as well, but it looks like the supply and demand of workers in this sector is becoming more balanced.

Job stayers saw a 5.9% increase in pay, the slowest growth since October 2021. Job changers saw a 9.5% increase.

The Dallas Fed Manufacturing Index fell six points to -11.2, the lowest since May of 2020. Pricing pressures were below historical averages, while wage growth did increase.

With these data points out there, I still don’t see how the Atlanta Fed sees Q3 GDP growth at 5.9%.

Mortgage applications increased 2.3% last week as purchases increased 2% and refis rose 3%. “Mortgage rates were mostly unchanged last week, with the 30-year fixed rate remaining at 7.31 percent – the highest since December 2000. Treasury yields peaked early in the week and did move lower by the end, which may have spurred some activity,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Mortgage applications for home purchases and refinances increased for the first time in five weeks but remained at low levels. Purchase applications increased but were still 27 percent lower than a year ago, as elevated mortgage rates and tight housing inventory continue to weigh on home buying activity.”

Pending home sales increased 0.9% MOM, according to the National Association of Realtors. Year-over-year, transactions fell 14%. The rate lock-in effect is a big issue, keeping people from selling their homes. “The small gain in contract signings shows the potential for further increases in light of the fact that many people have lost out on multiple home buying offers,” said NAR Chief Economist Lawrence Yun. “Jobs are being added and, thereby, enlarging the pool of prospective home buyers. However, rising mortgage rates and limited inventory have temporarily hindered the possibility of buying for many.”

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are up on the weak JOLTS report.

Job openings fell pretty dramatically in July, according to the JOLTS report. Job openings fell by 338,000 to a seasonally adjusted level of 8.8 million. On a year-over-year basis, openings are down 2.5 million.

Job openings fell in professional and business services, health care and social services and government. The quits rate edged down to 2.3%, as quits fell by 250k.

The Fed pays close attention to the JOLTs number and this is a big sign than the Fed’s tightening regime is finally gaining some traction in the labor market.

Consumer confidence fell pretty dramatically in August, according to the Conference Board. “Consumer confidence fell in August 2023, erasing back-to-back increases in June and July,” said Dana Peterson, Chief Economist at The Conference Board. “August’s disappointing headline number reflected dips in both the current conditions and expectations indexes. Write-in responses showed that consumers were once again preoccupied with rising prices in general, and for groceries and gasoline in particular. The pullback in consumer confidence was evident across all age groups—and most notable among consumers with household incomes of $100,000 or more, as well as those earning less than $50,000. Confidence held relatively steady for consumers with incomes between $50,000 and $99,999.”

There is a pretty big gap between what consumers feel about their current situation and how they perceive the future.

Bonds seem to like the economic numbers this morning, with the 10 year yield moving sharply lower.

Home prices rose 3% YOY in the first quarter, according to the FHFA House Price Index. They rose 1.7% compared to the first quarter. The areas that lagged the previous boom are now experiencing robust gains, while the Mountain and Western states are seeing stagnation.

Based on the three quarters ending in June, the new conforming loan limit would be about 747k.

The Case-Shiller Home Price Index rose 0.9% MOM in June, which was flat compared to a year ago. The index noted the same regional split: “Regional differences continue to be striking. On a year-over-year basis, June’s three best-performing cities were Chicago (+4.2%), Cleveland (+4.1%), and New York (+3.4%) – the same three that had topped our May leader board. At the other end of the scale, the worst performers continue to be in the Pacific and Mountain time zones, with San Francisco (-9.7%) and Seattle (-8.8%) at the bottom. The Midwest (+2.8%) continues as the nation’s strongest region, followed this month by the Northeast (+1.6%). The West (-5.9%) remains the weakest region. As the great philosopher Huey Louis said, its hip to be square.

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Vital Statistics:

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

We have a heavy week of data coming up with home prices and consumer confidence on Tuesday, GDP on Wednesday, the PCE Price Index on Thursday, and the jobs report on Friday. The PCE Price Index (the Fed’s preferred inflation measure) will be the most important number this week followed by the jobs report on Friday.

Jerome Powell’s speech at Jackson Hole last week didn’t break any new ground – he basically stressed that the Fed remains committed to getting inflation down to 2% and that interest rates are restrictive. They will remain restrictive for a some time.

Bloomberg asked Philly Fed President Patrick Harker if the Fed had “destroyed the mortgage market for a generation.” Harker acknowledged that it is really tough out there, especially for first-time homebuyers who are struggling with high rates and limited inventory. He said “that’s why I think we don’t keep going with rates.” He noted that the homebuilders are doing well, and that there is a lot of multi-family inventory coming on line. Still, housing (un)affordability is back at levels last seen during the financial crisis.

While housing affordability concerns are not part of the Fed’s job description, I am sure Washington doesn’t want to see this continue, especially going into an election year. I have to imagine the administration is whispering into Powell’s ear, advocating for the Fed do something about housing.

The Atlanta Fed’s GDP Now model got a lot of mentions at the conference. It currently sees Q3 GDP growth at 5.9%, which would be the strongest growth since 1983, aside from the post-lockdown rebound. I discussed it in my latest Substack and took a close look at the numbers. Check it out and please consider subscribing.

Guild Mortgage has acquired First Centennial Mortgage, based in the Midwest. Terms of the transaction were not disclosed.

ICE and Black Knight have entered into a consent decree with the FTC that will allow their merger to close on September 5. The companies agreed to divest Empower and Optimal Blue to Constellation Software in order to alleviate antitrust concerns.

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Vital Statistics:

Stocks are higher this morning as we await Jerome Powell’s Jackson Hole speech. Bonds and MBS are down.

I haven’t seen the prepared remarks for Powell’s speech at 10:00 am. The Washington Post thinks “Powell may stop short of declaring mission accomplished. Fed officials have long said that they will not let up prematurely, and they could push even harder to snuff the remaining inflation out of the economy.”

The Boston Fed President Susan Collins said “We may need additional increments, and we may be very near a place where we can hold for a substantial amount of time,” she said in an interview with Yahoo! Finance from Jackson Hole. I do think it’s extremely likely that we will need to hold for a substantial amount of time but exactly where the peak is, I would not signal right at this point,” she said. “We may be near but we made we may need to increase a little bit further,” said Collins, who doesn’t vote on policy this year.

Former Treasury Secretary Larry Summers urged continued hawkishness in an editorial in the Washington Post. He talks about how the current path of inflation mirrors the the inflation of the 1970s.

Of course a big reason why we saw massive inflation in the 1970s was because oil went from $27 a barrel to $150 a barrel, which isn’t similar to today, at all.

We got a new Atlanta Fed GDP Now estimate yesterday, with its model seeing 5.9% GDP growth in Q3. FWIW, this number simply seems wrong considering the other economic data we are seeing. Aside from the jump associated with re-opening the economy after COVID, the last time we saw that high of a jump was in the early 80s, coming out of the severe 81-82 recession. Even during the Roaring 90s, GDP growth topped out around 5%.

Don’t forget student loan repayments start in October, and many haven’t paid a cent for 3 years. That will be a big contractionary pulse in the economy.

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Vital Statistics:

Stocks are higher this morning after strong numbers out of market darling Nvidia. Bonds and MBS are down small.

The Jackson Hole summit begins today, and the focus will be Jerome Powell’s speech tomorrow. “As we await Fed Chair Powell’s speech at Jackson Hole tomorrow, this challenge means that central bankers have a much harder time relative to last year,” Deutsche Bank’s Henry Allen said. “Bear in mind that a year ago, CPI inflation in both the US and the Euro Area was still running above 8%, so the way forward was pretty clear for policymakers. But now inflation has fallen by some distance, there’s much more doubt about how sticky it will end up proving, and thus how much more central bankers still need to do.”

The S&P Flash PMI showed the economy decelerating from July. This stands in stark contrast to the Atlanta Fed’s GDP Now forecast of 5.8% GDP growth in Q3. Does the chart below look like we are getting 5.8% GDP growth in Q3? I’m not seeing it.

The manufacturing economy remains in contraction and the service sector is barely expanding.

“A near-stalling of business activity in August raises doubts over the strength of US economic growth in the third quarter. The survey shows that the service sector led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.

“Companies report that demand is looking increasingly lethargic in the face of high prices and rising interest rates. A resultant fall in new orders received by firms in August could tip output into contraction in September as firms adjust operating capacity in line with the deteriorating demand environment. Hiring could likewise soon turn into job shedding in the coming months after a near-stagnation of employment in August.

“Rising wage pressures as well as increased energy prices have meanwhile pushed input cost inflation higher, which will raise concerns over the stickiness of consumer price inflation in the months ahead. One upside is that weak demand is starting to limit pricing power, which should help keep a lid on inflation around the 3% mark.”

The 5.8% GDP forecast makes zero sense, especially when you take into account all the tightening that has already occurred.

In other economic news, initial jobless claims fell to 230k, while durable goods orders fell 0.5%. The Chicago Fed National Activity Index showed growth accelerated in July after decelerating in June.

The national delinquency rate inched up 9 basis points to 3.21%, according to Black Knight. Loans in foreclosure fell to 220k, the lowest since the end of the foreclosure moratorium.

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Vital Statistics:

Stocks are higher this morning as the rise in the 10 year yield pauses. Bonds and MBS are flat.

Bond yields are at the highest levels since November 2007. Investors are nervous ahead of Jerome Powell’s speech in Jackson Hole this Friday. The fear is that the neutral interest rate – called r* – might need to be higher than it was pre-pandemic. In other words, we have had a seismic shift in interest rate levels, and the era of ZIRP (from 2008 to 2022) is over.

From BMO strategists: “What started as a simple supply concession for a slightly larger-than-anticipated August refunding auction series has snowballed” into traders revisiting the most important pillars supporting the lower-rate thesis — one of which was that the neutral policy rate wouldn’t be “sustainably higher in the post-pandemic world.” As the thinking goes now, the Fed’s policy rate target might need to be higher than where it was prior to 2020 even if inflation returns to 2%, policy makers could be forced to delay their first rate cut, or possibly both. The most current guess as to where r-star lies is 0.5% — after subtracting 2% inflation from the Fed’s long-run estimate of where interest rates will eventually settle, which was 2.5% as of June.”

S&P has downgraded 5 regional banks on the “higher for longer” outlook on rates and commercial real estate concerns. The companies affected were Keycorp, Comerica, Valley, Associated Banc, and UMB. “Amid higher for longer interest rates, we expect further asset quality deterioration,” it warned. “Banks with material exposures to commercial real estate, especially in office loans, could see some of the greatest strains on asset quality.”

Existing Home Sales fell 2.2% in July to a seasonally-adjusted annual rate of 4.07 million. This is down 16.6% compared to a year ago. “Two factors are driving current sales activity – inventory availability and mortgage rates,” said NAR Chief Economist Lawrence Yun. “Unfortunately, both have been unfavorable to buyers.”

The median home price rose 1.6% to $406,700. Inventory was down 14.6% YOY to 1.11 million units. The first-time homebuyer accounted for 30% of sales, up from 27%.

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Vital Statistics:

Stocks are higher this morning as the world’s central bankers head to Jackson Hole. Bonds and MBS are flat.

The upcoming week will be dominated by the Jackson Hole Summit. The two main topics will probably be China’s collapsing real estate bubble and the surprising strength of the US economy. Jerome Powell will speak on Friday.

As far as economic data, we will get existing home sales, new home sales and consumer sentiment.

Jackson Hole summits generally don’t include much in the way of market-moving data, however the long timespan between the July and September FOMC meetings will have investors looking for clues. The general consensus from Street strategists is that Powell’s posture will remain hawkish although he might focus more on dissuading investors from pricing in rate cuts next year than signaling further increases this year.

The 10 year bond yield has picked up 36 basis points since the end of July. Meanwhile, the 2s/10s spread remains highly inverted, although the yield curve has shed some of its inversion, increasing from – 91 bps to -66 bps. Still, on a historical basis the 2s/10s spread is at levels last seen during the early 1980s when Paul Volcker tightened aggressively to conquer 1970s inflation.

I still think the reason for the economy’s resilience in the face of Fed hikes is that even though the Fed began tightening in 2022, real (inflation-adjusted) interest rates didn’t turn positive until the end of the 2022. Even though the Fed was bumping up short term rates, they were still negative, and negative real interest rates are stimulative. In other words, the Fed was still giving the patient shots of adrenaline, just at smaller doses.

In fact, if you look at the Fed Funds rate minus the sticky CPI (ex-food and energy), real interest rates are still negative.

Monetary policy is tight compared to the era of zero percent interest rates, but historically it is still stimulative. The Goldilocks scenario is that inflation returns to normal, and that is possible given the situation in China which is echoing Hemingway’s about going bankrupt gradually then suddenly. The bursting real estate bubble will sap global aggregate demand, and that should be the final nail in COVID-flation.

I think the elephant in the room at Jackson Hole will be China, not US inflation and the concern will be Western banking exposure to a collapsing Chinese real estate market. What will happen to big banks like HSBC, Standard Chartered, Nomura, etc? That will make Silicon Valley Bank look like a tempest in a tea pot.

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