All Things in Moderation

Vital Statistics:

Stocks are lower as investors fret about the state of the economy. Bonds and MBS are up.

Housing starts fell 1.9% MOM and 21.8% YOY to an annualized rate of 1.38 million. This was a touch above expectations. Building Permits fell 1.6% MOM and 29.9% YOY. This is not surprising given how lousy the home purchase market is. KB Home announced that their cancellation rate was so large, they were halting new projects and just working on the backlog.

On the plus side, mortgage rates are down over 1% compared to October – November 0f 2022. Homebuilders are cutting prices as well, which is good news for affordability.

Meanwhile, Elizabeth Warren is agitating for nationwide rent control using the FTC and HUD as levers to cap rents. No legislation required. I don’t think rent control has ever had the effect she wants (increasing supply and lowering costs), but maybe this time will be the charm. So, who wants to build an apartment complex at a 2% cap rate? Bueller?

The labor market remains tight as a drum. Initial Jobless Claims fell to 190,000 last week, which was the lowest level since the late 1960s when we had a military draft. We are seeing more dovishness out of the Fed speakers, as Harker and Logan want to moderate the pace of increases. Meanwhile Bullard and Lester want to keep rates higher for longer.

Here is a chart of initial jobless claims from 1967 – 1970.

Interesting stat out of China: The population fell in 2022. Since population growth is one of the biggest drivers of climate change, this probably takes the doomsday scenarios off the table if it continues a trend. Instead of 30 billion people by 2100, we might only get 10 billion.

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Vital Statistics:

Stocks are higher this morning on better-than-expected inflation data. Bonds and MBS are up.

Inflation at the wholesale level fell 0.5% month-over-month according to the Producer Price Index. This comes after a 0.4% increase in October and a 0.2% increase in December. The decline was driven primarily by a decrease in energy prices. The index was up 6.2% on a YOY basis.

Stripping out food, energy and trade services the index rose 0.1% MOM in January and 4.6% YOY. Overall, it looks like inflation is on the way down, however as far as the Fed is concerned it wants to see the labor market come more in balance.

Homebuilder sentiment rose slightly in January, according to the NAHB / Wells Fargo Housing Market Index. This is after a string of declines driven by rising interest rates. “It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.” Remember that home construction is a classic early-stage cyclical and is one of the first sectors to recover after a recession.

Retail sales fell 1.1% in December, according to the Census Bureau. This follows a decline in November. On a year-over-year basis, retail sales rose 6.0% YOY, which means it was down about 0.5% once you take into account the 6.5% rise in the CPI. This doesn’t bode well for Q4 GDP growth since consumption is about 70% of GDP. The Atlanta Fed’s GDP Now model sees 4.1% growth in Q4, though it will be updated sometime today. This just seems out of step with the data out there, but perhaps it is explained by inventory build.

Mortgage Applications rose 27% last week as purchases rose 25% and refis rose 34%. These numbers include an adjustment for the holiday-shortened New Year’s holiday however falling rates are helping things. That said we have a long way to go to get to some semblance of normalcy.

“Mortgage application activity rebounded strongly in the first full week of January, with both refinance and purchase activity increasing by double-digit percentages compared to last week, which included the New Year’s holiday observance,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Despite these gains, refinance activity remains more than 80% below last year’s pace and purchase volume remains 35% below year-ago levels. Mortgage rates are now at their lowest level since September 2022, and about a percentage point below the peak mortgage rate last fall. As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers.”

Industrial production fell 0.7% in December, and manufacturing production fell 1.3%. Capacity Utilization fell from 79.4% to 78.8%. Again, I have to look at the Atlanta Fed’s estimate and I don’t see how this data comports with 4.1% GDP growth.

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Vital Statistics:

Stocks are lower this morning after Goldman Sachs’s earnings disappoint. Bonds and MBS are down.

The week ahead won’t have much in the way of market-moving data, although we will get retail sales on Wednesday which will be a report on the holiday shopping season and will be a big input into Q4 GDP. We will also get housing starts and existing home sales. Earnings from the financials will be a lot of the main news flow. The World Economic Forum will meet in Davos as well.

The US will hit the debt ceiling this week as well, which promises some kabuki theater from Washington as people make dire predictions over what would happen if the US defaults on its debt. Of course it won’t default.

Business Activity contracted sharply in New York State, according to the Empire State Manufacturing Report. We are back at levels seen during the lockdowns and the depths of the Great Recession. This was the fifth worst reading in the index’s history.

On the positive side, the prices paid and prices received indices dropped sharply. Inventory levels are back to normal as well.

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The FTC is looking to ban or severely restrict non-compete agreements. This could have some major reverberations in the mortgage banking business. These got overused in the past several years – low level employees in fast food restaurants were subject to them – but it will be interesting to see how industry reacts. Perhaps some LO comp will be deferred?

The economic effects of this will probably be to lift wage inflation, at least a little.

I published another article in my Substack last weekend, and talked about one statistic that jumped out at me. I didn’t mention it here. Check it out and please consider subscribing.

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Vital Statistics:

Stocks are lower as we kick off earnings season. Bonds and MBS are up.

Consumer sentiment improved in January, according to the University of Michigan Consumer Sentiment Survey. The reading on personal finances drove the increase based on higher incomes and lower inflation. These consumer sentiment surveys are highly influenced by gasoline prices, and the decline at the pump is helping things.

Inflationary expectations fell from 4.4% to 4% which is good news for those who want the Fed to take its foot off the brake. Consumer sentiment is still awful overall, stuck at the levels we saw during the Great Recession.

Wells reported a decline in fourth quarter earnings, however there were a lot of special charges which makes a QOQ and YOY comparison difficult. Revenues rose 0.7% QOQ and EPS fell 21% to $0.67. The company took provisions for CFPB settlements, home lending severance, and impairments in its venture capital business.

Delinquencies are starting to tick up, with provisions for credit losses and charge-offs up QOQ and YOY. Credit cards drove the increase. Mortgage originations fell 32% QOQ and 70% YOY to $14.6 billion. The press release didn’t address the exit from correspondent lending, but I am sure it will come up on the conference call.

JP Morgan reported earnings per share climbed 14% QOQ and 7.2% YOY to $3.57 per share. Like Wells, the company built up its reserve for loan losses and increased charge-offs. Mortgage originations fell 45% QOQ and 72% YOY to $6.7 billion.

Apartment rental rates rose 5% YOY according to data from Redfin. They were down 1.4% MOM and off 3.6% from the peak set in August. Some of this is seasonality, however the massive growth we saw in 2021 is over, and rents will generally lag home prices by 21 months or so. “Rents have room to fall. While they’ve cooled significantly from their peak, it still costs the typical renter 20% more to take on a new lease than it did two years ago,” said Redfin Economics Research Lead Chen Zhao. “An increase in the number of rentals on the market  should also cause rents to ease in the coming months. Rental supply is growing due to an influx of construction in recent years, ebbing household formation and a slow homebuying market, which is driving many homeowners to rent out their properties rather than sell.”

I launched my Substack over the weekend, where I took went over the market’s reaction to the jobs report and the main drivers. The Weekly Tearsheet will take a deeper dive into some of the happenings in the prior week, along with economic commentary. I hope you enjoy it and consider subscribing. If you use this professionally and can expense it, I hope you consider becoming a paid subscriber.

I am accepting ads for this blog as well, if you would like a mention. In addition, if you enjoy the content and would like a white label solution for your company, I would be interested in having a conversation.

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Vital Statistics:

Stocks are lower this morning despite a positive CPI report. Bonds and MBS are up.

Consumer prices fell 0.1% in December, according to the Consumer Price Index. They rose 6.5% on an annual basis. The core rate, which excludes food and energy rose 0.3%. The decrease in the headline rate was due mainly to falling gasoline prices. The core rate did increase from November, however that was due primarily to housing. The trend overall has been down, which should be good news for the Fed, with emphasis on the should. I did a deep dive over the weekend why the action we are seeing in the CPI is a necessary, but not sufficient, condition for the Fed to stop tightening.

Bonds definitely liked the data however, with the 10 year bond yield falling below 3.5%.

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Initial jobless claims came in at 205,000, which is still exceptionally low by historical standards.

Philly Fed President Harker said that the era of aggressive rate hikes are over and it will probably make sense to increase in smaller, 25 basis point increments. “I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Harker said in the text of a speech. “In my view, hikes of 25 basis points will be appropriate going forward.”

If “a few more times” = three more hikes, then we will be looking at a range of 5% – 5.25% by the May meeting. This would comport with the end-of-year forecast by the Fed in December.

Note the Fed Funds futures are still more dovish than the Fed.

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

Jerome Powell spoke yesterday and it doesn’t appear that he had much to say in terms of current monetary policy. The issue at hand was central bank independence. Powell acknowledged that rate hikes will be unpopular politically, but welcomed the absence of political control over monetary policy. I suspect this is temporary, and if the economy slows dramatically the Fed will see pressure from Congress to cut rates.

Powell also acknowledged that the Fed is getting pressure to “act on climate.” This means he is getting pressure from activists to use the Fed’s supervisory authority to discourage investment in fossil fuels. Climate Action 100 is a consortium of banks and investment firms that have pledged not to lend to energy companies, and I suspect the activists want the Fed to either explicitly prohibit fossil fuel lending or to use some other lever to discourage it. Powell pushed back on this: “But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.  We are not, and will not be, a “climate policymaker.”

Mortgage Applications fell 1.2% last week as purchases fell 1% and refis fell 5%. Total applications are down 48% on a YOY basis and refis are down a whopping 86%. “Mortgage rates declined last week as markets reacted to data showing a weakening economy and slowing wage growth. All loan types in the survey saw a decline in rates, with the 30-year fixed rate falling to 6.42 percent. Purchase applications continued to be hampered by broader weakness in the housing market and declined slightly over the week, with the index slipping to its lowest level since 2014,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “There was an increase in refinance activity as a result of the 16-basis-point decline in rates, as both conventional and government refinance applications increased. However, the overall pace of refinance applications was lower than November and December’s 2022 averages, and over 80 percent lower than a year ago. Refinances were about 30 percent of all applications last week — well below the past decade’s average of 58 percent.”

Wells is drastically shrinking its mortgage footprint. It will exit correspondent and will only originate mortgages for its own clients and borrowers in minority communities. Not too long ago, Wells was the biggest mortgage banker in the US. “We are acutely aware of Wells Fargo’s history since 2016 and the work we need to do to restore public confidence,” [Chief Consumer Lending Officer] Santos said in a phone interview. “As part of that review, we determined that our home-lending business was too large, both in terms of overall size and its scope.”

Wells will also be significantly shrinking its servicing portfolio. It is amazing how much capacity is being wrung out of the mortgage business over the past year. This should translate into higher margins into 2023.

Are we seeing signs of a turn in housing? Perhaps. The Fannie Mae Home Purchase Sentiment Index increased in December, albeit it is barely higher than the all-time low set in October. “In December, the HPSI inched upward slightly, as consumers reported increased expectations that mortgage rates and home prices may decrease over the next year – perhaps reflecting recently observed declines in mortgage rates and average home prices,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “However, the HPSI remains very low by historical standards, particularly the ‘good time to buy’ component, and respondents continue to cite high home prices and unfavorable mortgage rates as the primary reasons for their pessimism. As we enter 2023, we expect affordability to remain the top challenge for potential homebuyers, as even small declines in rates and home prices – from the perspective of the buyer – may not produce sufficient purchasing power. At the same time, existing homeowners may continue to wait to list their properties, since many have already locked in lower mortgage rates, creating minimal incentive to sell and buy again until rates are more favorable. We think the resulting tension will contribute to a continued decline in home sales in the coming months.”

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Stocks are lower as we await Jerome Powell’s speech in Sweden. Bonds and MBS are up.

Small Business Optimism declined in December, according to the NFIB Small Business Optimism Index. “Overall, small business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate,” said NFIB Chief Economist Bill Dunkelberg. “Owners are managing several economic uncertainties and persistent inflation and they continue to make business and operational changes to compensate.” You can see in the chart below, we are at the lowest levels in nearly a decade.

Despite the overall gloom, there were some positive points in the survey. Inventories are back in balance, which means the supply chain issues of the post-pandemic period are largely in the rear view mirror. The number of companies raising prices also fell, and employers continue to plan to hire more workers.

Generally speaking companies do expect a recession in 2023 and are taking steps to prepare themselves for it.

Minneapolis Fed President Neel Kashkari wrote an article on inflation which discusses what the Fed missed in 2021 and lays out what it might do going forward. His point is that when prices rise, both supply and demand should adjust. Rising prices should decrease demand and increase supply. The problem is that supply hasn’t increased.

He likens it to surge pricing on ride sharing apps. When it rains more people would rather ride than walk. Prices rise. However what happens when every available driver is already working? Supply doesn’t increase. And that is where we are now. In economics terms, the supply curve is vertical. Increased demand just increases prices.

If this sounds familiar to old-timers, they might recognize the term “supply-side economics” from the late 1970s and the Reagan Administration. We had this problem during the 70s, when US manufacturing capacity was more or less maxxed out, and rising demand simply meant higher prices.

Supply side economics incentivized producers to increase capacity, which would address the lack of incremental supply (hence the name “supply-side)” The government cut taxes, which made it more likely that new projects would be profitable (or NPV-positive in B-school jargon) and it also changed the rules on depreciation which allowed companies to recoup capital expenditures quicker through bigger up-front tax deductions. While the term “supply side” has become a pejorative on the left, that was the logic of it.

It is interesting to see guys like Neel Kashkari who were too young to remember the 1970s inflation issues start to think about supply side economics. Global economies have done the Keynesian pump-priming thing for the past 15 years, which was more or less what we did from 1965 – 1980. Similar results. So perhaps a new, re-branded supply-side economics will become in vogue again.

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Stocks are higher this morning on follow-through from the jobs report on Friday. Bonds and MBS are up.

The week ahead will have some important economic data with the consumer price index on Thursday and the University of Michigan Consumer Sentiment survey on Friday. The Michigan number will focus on inflation expectations, which is something the Fed is laser-focused on. Jerome Powell will speak on Tuesday.

Earnings season kicks off this week with the big banks reporting. The Street is looking for weak numbers and a string of layoffs. Goldman will be laying off about 3,200 employees this week, and we have seen plenty of layoffs in tech-land. The Fed wants to see a weaker labor market, so they might get what they are looking for.

Rate lock volumes declined 19.4% in December, according to Black Knight’s Mortgage Monitor. Purchase locks were down 20.5%, while rate / term were down 11.2% and cash-outs were down 14%. “Mortgage rates declined through the first half of December but reversed course as the Fed doubled down on their stance of additional tightening in 2023,” said Kevin McMahon, president of Optimal Blue, a division of Black Knight. “The spread between mortgage rates and the 10-year Treasury yield narrowed another 22 basis points during the month to 264 basis points, which is 40 basis points off the recent high, but is still up 81 basis points for the year.”

“Using Black Knight’s McDash mortgage performance data to provide comparative history, December saw the fewest purchase locks in a single month since early 2014, and the fewest overall rate locks on record dating back to January 2000 when Black Knight began reporting origination metrics,” McMahon continued. “The number of mortgage holders locking in a rate to refinance their existing mortgage also set a new record low for the fourth consecutive month.”

Given the absence of refi activity, seasonality is a big driver these days. We will probably continue to report lousy volumes until the Spring Selling Season starts in a month or so.

Another positive for inflation. Ocean shipping rates are down 80% from their peak in September. It may not have a massive effect of prices for consumers, but it certainly helps.

Finally, some news from me. I launched my Substack over the weekend, where I took went over the market’s reaction to the jobs report and the main drivers. The Weekly Tearsheet will take a deeper dive into some of the happenings in the prior week, along with economic commentary. I hope you enjoy it and consider subscribing. If you use this professionally and can expense it, I hope you consider becoming a paid subscriber.

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Vital Statistics:

Stocks are lower after stronger-than-expected labor market data. Bonds and MBS are down.

The economy added 235,000 jobs in December, according to ADP. This was above the 145,000 Street estimate, and is also above the forecast for tomorrow’s jobs report. Initial Jobless claims fell to 204,000 which signals the labor market remains tight. Finally, outplacement firm Challenger, Gray and Christmas noted 43,651 announced job cuts in in December.

The minutes from the FOMC meeting were released yesterday and they poured cold water on people hoping for a Fed pivot.

What about the dovish CPI reports in November and December? “Participants concurred that the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path. Participants noted that core goods prices declined in the October and November CPI data, consistent with easing supply bottlenecks…. Participants noted that, in the latest inflation data, the pace of increase for prices of core services excluding shelter—which represents the largest component of core PCE price inflation—was high. They also remarked that this component of inflation has tended to be closely linked to nominal wage growth and therefore would likely remain persistently elevated if the labor market remained very tight.”

In other words, the reduction in inflation is being driven primarily by easing supply chain issues which is old news. They see inflation as being driven by supply chain issues, housing, and wages. The supply chain issues are largely resolved. Housing-driven inflation will disappear by summer. The battle they are fighting is based on wages. As long as wage growth remains high, they are going to keep tightening. Below is a chart of average hourly earnings. We are in the low 5% range. They probably want to see that number closer to 3%. BTW the spikes up and down in the early days of COVID are lockdown-related noise.

The FOMC also noted that the Fed Funds futures were at odds with the FOMC, and that no members thought it would make sense for the Fed to start easing in 2023. Take a look below at the Fed Funds futures – the disconnect is pretty substantial:

The Fed also noted that financial conditions have eased, and that they don’t want a further easing. “Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.”

Home prices declined 3.2% on a QOQ basis, according to the Clear Capital Home Data Index. We are beginning to see big declines out West, and MSAs like San Francisco are now flat on a YOY basis. Florida remains one of the best markets.

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Vital Statistics:

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

The FOMC minutes will be released at 2:00 pm. This release could be market-moving as a lot of investors will be looking for the Fed’s rationale to raise its inflation target when the data were showing a slowdown.

Mortgage applications fell 13.2% over the past couple of weeks, according to the MBA. Purchases were down 12.2% while refis fell 16.3%. Refi activity is down 87% compared to a year ago. “The end of the year is typically a slower time for the housing market, and with mortgage rates still well above 6 percent and the threat of a recession looming, mortgage applications continued to decline over the past two weeks to the lowest level since 1996,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications have been impacted by slowing home sales in both the new and existing segments of the market. Even as home-price growth slows in many parts of the country, elevated mortgage rates continue to put a strain on affordability and are keeping prospective homebuyers out of the market. Refinance applications remain less than a third of the market and were 87 percent lower than a year ago as rates remained close to double what they were in 2021. Mortgage rates are lower than October 2022 highs, but would have to decline substantially to generate additional refinance activity.” 

Construction spending rose 0.2% MOM and 8.5% YOY in November, according to the Census Bureau. Residential construction spending fell 0.5% MOM and rose 5.3% on a YOY basis.

The manufacturing economy contracted in December, according to the ISM Manufacturing Index. The index came in at 48.4, the lowest since the early days of the pandemic. If the index comes in above 50, it is expanding, while below it is contracting. The prices index fell to 39.4, which is good news on the inflation front, while employment remained in expansion territory.

Job openings were more or less unchanged in November, according to the JOLTS job openings report. The quits rate (which tends to predict wage increases) ticked up as well.

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