All Things in Moderation

Vital Statistics:

Stocks are flattish as we await earnings from Nvidia after the close. Bonds and MBS are down small.

Consumer confidence fell sharply in February, according to the Conference Board. Both the Present Situation index and the Expectations index fell. “In February, consumer confidence registered the largest monthly decline since August 2021,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “This is the third consecutive month on month decline, bringing the Index to the bottom of the range that has prevailed since 2022. Of the five components of the Index, only consumers’ assessment of present business conditions improved, albeit slightly. Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a ten-month high.”

The Expectations Index is back at levels usually associated with an impending recession. Inflation and tariff fears are the biggest drivers, though we are also seeing consumers become less constructive on the labor market.

Richmond Fed President Thomas Barkin said the fight against inflation is facing headwinds such as changing demographics and higher government spending. “If headwinds persist, we may well need to use policy to lean against that wind,” he said. In other words, rates may have to be higher for longer. “We learned in the ’70s that if you back off inflation too soon, you can allow it to re-emerge. No one wants to pay that price.”

The price differential between new construction and existing homes has disappeared, according to the NAHB. Limited inventory of existing homes is pushing median sales prices higher, while builder decisions (a focus on lower-priced offerings) is the driver for new homes. In the fourth quarter of 2024, the differential was only around $9,000 versus a $50,000 10 year average.

Mortgage applications fell 1.2% last week as purchases rose 0.2% and refis fell 3.6%. “Treasury yields moved lower on softer consumer spending data as consumers are feeling somewhat less upbeat about the economy and job market. This pushed mortgage rates lower, with the 30-year fixed rate decreasing to 6.88 percent, the lowest rate since mid-December,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Applications were about one percent lower for the week, which included the President’s Day holiday, as purchase applications stayed flat from a week ago while refinance applications saw a small decline. Purchase applications were up 3 percent from the same week last year. Increasing for-sale inventory in some markets has provided prospective buyers more options as we approach the spring homebuying season.”

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Vital Statistics:

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

Housing starts fell to a seasonally adjusted annual rate of 1.366 million in January. This is a 9.8% decreased compared to December, and a 0.7% decrease on a year-over-year basis. Building Permits were flat at 1.48 million.

Homebuilder sentiment crashed in February, according to the NAHB Housing Market Index. Blame Tariffs. “While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan. “Uncertainty on the tariff front helped push builders’ expectations for future sales volume down to the lowest level since December 2023. Incentive use may also be weakening as a sales strategy as elevated interest rates reduce the pool of eligible home buyers.”

“With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs,” said NAHB Chief Economist Robert Dietz. “Reflecting this outlook, builder responses collected prior to a pause for the proposed tariffs on goods from Canada and Mexico yielded a lower HMI reading of 38, while those collected after the announced one-month pause produced a score of 44. Addressing the elevated pace of shelter inflation requires bending the housing cost curve to enable adding more attainable housing.”

So the HMI report was positively impacted by the 30 day suspension of tariffs.

Mortgage applications fell 6.6% last week as purchases fell 6% and refis fell 7%. “Mortgage rates decreased on average over the week, as markets brushed off unexpectedly strong inflation data. Despite mortgage rates declining, with the 30-year fixed mortgage rate dropping to 6.93 percent, mortgage applications decreased to their slowest pace since the beginning of the year,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications were down for the week, as buyers remained on the fence, although loosening inventory may help support activity in the coming months. Refinance applications had been rising in previous weeks but dipped as rates remained close to 7 percent.”

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Vital Statistics:

Stocks are flat after the CPI came in higher than expected. Bonds and MBS are down.

Consumer prices rose 0.5% MOM in January, according to the BLS. This was higher than the 0.3% Street expectation. The core rate rose 0.4%. Given that we have typically seen a bump in January as companies raise prices in the new year, a 0.3% increase was probably tough to get. On a year-over-year basis, the headline rate rose 3% and the core rate rose 3.3%.

The shelter index rose 4.4% on a YOY basis, the smallest increase since January, 2022. Transportation (especially motor vehicle insurance) was up 8% on a YOY basis.

The bond market sold off pretty heavily on the number, with the 10 year yield rising about 10 basis points. That said, sentiment in the bond market remains lousy given the tariff backdrop, and rates are up big in Europe and Asia today.

I showed the chart below yesterday, which gives an idea of how much annual inflation is front-loaded in the first quarter, and how inflation seems to tail off as the year goes on. I put a red line on the chart to show the January of 2025 number. The 0.3% expectation was basically a heavy lift, given that pre-pandemic January inflation typically came in at that level, but we are close. Things are improving.

Jerome Powell testified in front of the Senate yesterday as part of his semiannual Humprey-Hawkins testimony. Here are his prepared remarks.

With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will assess incoming data, the evolving outlook, and the balance of risks.

The March Fed Funds futures see little to no chance of a rate cut, and the December futures see a 32% chance of no cuts this year. The bottom line is that rates are still restrictive but as long as the economy continues to behave they will remain that way.

Mortgage applications rose 2.3% last week as purchases fell 2% and refis rose 10%. “Mortgage rates moved slightly lower last week, which led to the pace of refinance applications reaching its strongest week since October 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The average loan size for refinance borrowers increased, as these borrowers tend to be more responsive for a given change in rates. Purchase applications were down from the previous week’s level but were slightly ahead of last year’s pace. The average loan size for a purchase application increased to its highest level since March 2022 at $456,100, partially driven by fewer FHA purchase applications but more VA loans compared to the previous week.”

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Vital Statistics:

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

The services PMI declined in January, according to the Institute for Supply Management. The index declined from 54% to 52.8% on weaker activity and orders, however it remains in expansion territory, where it has been for nearly the past 5 years.

While activity declined somewhat, there were two bright spots. Employment increased by 1% and prices declined by 4%. Tariffs remain a worry. “January was the second month in a row with all four subindexes that directly factor into the Services PMI^® — Business Activity, New Orders, Employment and Supplier Deliveries — in expansion territory. Slower growth in the Business Activity and New Orders indexes led to the lower composite index reading. Poor weather conditions were highlighted by many respondents as impacting business levels and production. Like last month, many panelists also mentioned preparations or concerns related to potential U.S. government tariff actions; however, there was little mention of current business impacts as a result.”

Announced job cuts increased 28% to 49,795 in January, according to the Challenger and Gray Job Cut Report. While this is an increase from December, there is a big seasonal element, and it is a decrease of 40% compared to January of 2024. Hiring plans increased.

Productivity declined in the fourth quarter to 1.2% compared to 2.3% in the third quarter. Unit labor costs increased from 0.5% to 3.0%. This might have explained why inflation reappeared in Q4. Output increased 2.3% and hours worked increased 1%.

Productivity is a big driver of non-inflationary growth, and it has been trending down for the past couple of years. Note that productivity collapsed in 2022, right about the time inflation was peaking

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Vital Statistics:

Stocks are higher this morning after good numbers out of Apple. Bonds and MBS are down small.

Personal Incomes rose 0.4% in December, in line with expectations. Personal Spending rose 0.7%, which was higher than expectations. Higher spending was driven by energy, transportation and shelter.

The all-important PCE Price Index rose 0.3% MOM and 2.6% YOY. The core rate rose 0.2% MOM and 2.8% YOY. All of the inflation numbers were in line with expectations.

The gradual increase we saw in core PCE last fall seems to be over. Meanwhile, the headline rate has been rising due to higher energy costs.

The bond market took the number in stride, with little movement in the aftermath.

Pending Home Sales fell 5.5% in December, according to NAR. “After four straight months of gains in contract signings, one step back is not welcome news, but it is not entirely surprising,” said NAR Chief Economist Lawrence Yun. “Economic data never moves in a straight line. High mortgage rates have not significantly dented housing demand due to greater numbers of cash transactions.”

“Contract activity fell more sharply in the high-priced regions of the Northeast and West, where elevated mortgage rates have appreciably cut affordability,” said Yun. “Job gains tend to have greater impact in more affordable regions. It is unclear if heavier-than-usual winter precipitation impacted the timing of purchases.”

Fed Governor Michelle Bowman said that progress on inflation was “noticeably” slower than 2023 which warranted a more cautious approach to interest rates. The increase in long-term rates since the Fed started cutting was a “reflection of investors’ concerns about the possibility of tighter-than-expected policy that may be required to address inflationary pressures.”

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Vital Statistics:

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

The Index of Leading Economic Indicators declined 0.1% in December, according to the Conference Board. “The Index fell slightly in December failing to sustain November’s increase,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Low consumer confidence about future business conditions, still relatively weak manufacturing orders, an increase in initial claims for unemployment, and a decline in building permits contributed to the decline. Still, half of the 10 components of the index contributed positively in December. Moreover, the LEI’s six-month and twelve-month growth rates were less negative, signaling fewer headwinds to US economic activity ahead. Nonetheless, we expect growth momentum to remain strong to start the year and US real GDP to expand by 2.3% in 2025.”

The big negative drivers were weak new orders from the ISM report, the slope of the yield curve, and negative consumer confidence. The big positive components were financial: easing credit conditions and the performance of the stock market.

D.R. Horton reported first quarter earnings. Revenues were down YOY as deliveries fell. Gross margins declined as the company is battling affordablity issues by offering mortgage buy-downs. “Although the level of new and existing home inventories has increased from historically low levels, the supply of homes at affordable price points is generally still limited, and demographics supporting housing demand remain favorable. Despite continued affordability challenges and competitive market conditions, incentives such as mortgage rate buydowns have helped to address affordability and spur demand. Additionally, given our focus on affordable product offerings, we have continued to start and sell more of our homes with smaller floor plans to meet homebuyer demand.”

You would think that with such a dearth of starter homes, D.R. Horton would be plowing cash back into the business. It is not. Over the past 12 months it has used all of its operating cash flow buying back stock and paying dividends, despite the fact that the operating business is generating an ROE approaching 20%. As a general rule, if a company expects to earn higher than its cost of capital on the underlying business, it expands the business. If it doesn’t, it should return that capital to shareholders. It is surprising then that DHI is eschewing profitable business opportunities and instead buying back its own stock.

Donald Trump has ordered “emergency relief” on housing affordability, and plans to attack regulatory costs: “Hardworking families today are overwhelmed by the cost of fuel, food, housing, automobiles, medical care, utilities, and insurance. Moreover, many Americans are unable to purchase homes due to historically high prices, in part due to regulatory requirements that alone account for 25 percent of the cost of constructing a new home according to recent analysis.”

I am not sure how much of that 25% is addressable at the Federal level and how much is local building / environmental codes. That said, it is encouraging that the government is taking a look at the issue.

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Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up.

Housing starts rose 15.8% MOM to a seasonally adjusted annual rate of 1.499 million. This was 4.3% below December 2023’s rate. Building permits fell 0.7% MOM to a seasonally adjusted annual rate of 1.483 million units. Both numbers were well above Street expectations.

Homebuilder sentiment improved modestly to kick off the new year, according to the NAHB. “NAHB is forecasting a slight gain for single-family housing starts in 2025, as the market faces offsetting upside and downside risks from an improving regulatory outlook and ongoing elevated interest rates,” said NAHB Chief Economist Robert Dietz. “And while ongoing, but slower easing from the Federal Reserve should help financing for private builders currently squeezed out of some local markets, builders report cancellations are climbing as a direct result of mortgage rates rising back up near 7%.”

Despite the affordability issues, the use of incentives and price cuts has remained steady since last summer. Sentiment remains strongest in the Northeast and Midwest, while the South and (especially) the West are struggling.

Fed Governor Chris Waller said that the Fed Funds futures might be too hawkish if inflation comes in as expected this year. “As long as the data comes in good on inflation or continues on that path, then I can certainly see rate cuts happening sooner than maybe the markets are pricing in,” Waller said during a “Squawk on the Street” interview with Sara Eisen.

Asked how many that could entail, he responded, “That’s all going to be driven by the data. I mean, if we make a lot of progress, you could do more,” which he said could mean three or four, assuming quarter percentage point increments.

“If the data doesn’t cooperate, then you’re going to be back to two and going maybe even one, if we just get a lot of sticky inflation,” he said.

Right now, the “maybe even one” scenario is the baseline according to the Fed Funds futures.

Interesting quote about how homebuyers are adjusting to the new normal: “My average first-time homebuyer now says $3,500 is comfortable, compared to the $2,000 to $2,500 range previously. Those looking for a family house now say $6,500 to $7,500; previously, $4,500 was the primary target. I’m also seeing more people more comfortable with $8,000 to $10,000 mortgage payments than ever. Honestly, for the first 20 years of my career, I don’t believe I ever had a mortgage payment offered over $10,000, and now I have a few of those each quarter.”

Industrial production rebounded smartly in December, according to the Federal Reserve. For the full year, industrial production rose 0.5%. Capacity utilization rose from 77% to 77.6%.

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Vital Statistics:

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

The bond market is down again today, with UK Gilt yields up 12 basis points this morning. Adding to the pressure on bonds was a lousy auction yesterday, with the 10 year yield hitting the highest level since 2007.

Job openings increased to 8.1 million at the end of December, according to the Bureau of Labor Statistics. This was an increase of 259k from the upward-revised November reading. On the other hand, the quits rate declined to 1.9%, which is a sign of weakness in the labor market.

Given the current bearish psychology of the bond market, bond investors focused on the 8.1 million job openings and ignored the quits rate. The red line is the job openings rate, while the blue line is the quits rate. The job openings rate is higher than pre-pandemic levels, while the quits rate is below pre-pandemic levels.

More indications that the labor market is cooling: The economy added 122,000 jobs last month, according to the ADP Employment Report. This was below expectations, and is less than Street expectations for Friday’s jobs report. “The labor market downshifted to a more modest pace of growth in the final month of 2024, with a slowdown in both hiring and pay gains,” said Nela Richardson, chief economist, ADP. “Health care stood out in the second half of the year, creating more jobs than any other sector.” Indeed, the bulk of the gains came in health care / education and leisure / hospitality. Manufacturing jobs fell.

Pay gains for job stayers fell to 4.6%, the lowest since July of 2021.

Mortgage applications fell 3.7% last week as purchases fell 7% and refis fell 2%. “Applications decreased last week as rising mortgage rates continued to discourage buyers from entering the market and put a damper on purchase activity. The 30-year fixed rate increased for the fourth consecutive week, reaching 6.99 percent – the highest rate since July 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications declined for both conventional and government loans and dropped to the slowest weekly pace since February 2024. Refinance applications increased despite higher rates, but the increase was compared to recent low levels and was driven entirely by an increase in VA refinances, which continue to show weekly swings.”

Adding fuel to the bonfire in the bond market was the ISM Services report, which showed the sector expanding again. “The Services PMI^® in December was boosted primarily by strength in the Business Activity and Supplier Deliveries indexes. Many industries noted that end-of-year and seasonal factors were helping drive business activity or impact inventory management. Some of the increased business activity seems to have been driven by preparation for demand in the new year, or risk management for impacts from ports strikes and potential tariffs. There was general optimism expressed across many industries, but tariff concerns elicited the most panelist comments.”

The prices index increased to 64.4%,which was the highest reading since January of 2024. There might have been some seasonal / end-of-year effects going on, so this is something to watch.

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Vital Statistics:

Stocks are higher as we begin 2025. Bonds and MBS are up.

Mortgage applications fell 22% over the past two weeks, according to the MBA. Refis fell 36%, but were up 10% on a year-over-year basis. Purchase volume fell 48% and was down 17% compared to a year ago. “Mortgage rates moved higher through the last full week of 2024, reaching almost 7 percent for 30-year fixed-rate loans,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Not surprisingly, this increase in rates – at a time when housing activity typically grinds to a halt – resulted in declines in both refinance and purchase applications.”

For-sale housing inventory rose 0.5% MOM and 12.1% YOY in November, according to Redfin. That said, much of this inventory has been hanging around for a while as sellers refuse to cut prices. Over half the inventory has been on market without a contract for over 60 days. This phenomenon is most concentrated in Florida and Texas, where there has been a lot of building. Rising HOA fees and insurance costs are making people re-thing moving to Florida.

Something to watch for 2025: The Chinese Government Bond yield. As the real estate bust settles in, Chinese government bond yields are collapsing as investors rush to put money in safe assets. China has a massive debt problem, similar to the US in 1929 and Japan in 1989. This will send a deflationary pulse throughout the world and should help to (a) push down yields globally, and (b) push down commodity inflation.

In the 1980s, the Japanese were voracious buyers of US real estate, and for the past 10 years, Chinese investors have been big buyers in the US and Canada. Chinese property investors may be forced to liquidate US holdings in order to cover debts. Since domestic demand in China is collapsing, the country should continue to run trade deficits globally, which means increased demand for sovereign debt, pushing global yields lower.

Just something to think about going forward. Have a happy and prosperous new year.

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ital Statistics:

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

The markets close early today in observance of Christmas Eve. Should be a quiet day.

New home sales rose 5.9% to a seasonally adjusted annual rate of 664,000 in November. This was up 8.7% compared to a year ago. The median sales price of new houses sold in November 2024 was $402,600. The average sales price was $484,800. The median price fell 6.3%, while the average price was down about 80 basis points.

Consumer confidence pulled back in December, according to the Conference Board. “The recent rebound in consumer confidence was not sustained in December as the Index dropped back to the middle of the range that has prevailed over the past two years,” said Dana M. Peterson, Chief Economist at The Conference Board. “While weaker consumer assessments of the present situation and expectations contributed to the decline, the expectations component saw the sharpest drop. Consumer views of current labor market conditions continued to improve, consistent with recent jobs and unemployment data, but their assessment of business conditions weakened. Compared to last month, consumers in December were substantially less optimistic about future business conditions and incomes. Moreover, pessimism about future employment prospects returned after cautious optimism prevailed in October and November.”

The CPFB is accusing Rocket Mortgage of illegal kickbacks. “Rocket engaged in a kickback scheme that discouraged home-buyers from comparison shopping and getting the best deal,” CFPB Director Rohit Chopra said in a statement. “At a time when homeownership feels out of reach for so many, companies should not illegally block competition in ways that drive up the cost of housing.”

Rocket responded by saying that one-third of the borrowers with an application in progress chose to go to a different lender: “The facts are clear – data shows one-third of consumers with a loan application already in progress with Rocket Mortgage, before contacting Rocket Homes, chose to close with a different lender,” the company said in a statement. “This proves Rocket Homes is committed to empowering home-buyers to make the best decisions for their unique needs.”

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