Stocks are lower this morning as investors fret about rising rates. Bonds and MBS are down.
The upcoming week will be dominated by inflation data, with the Consumer Price Index on Wednesday and the Producer Price Index on Thursday. The street is looking for 0.4% MOM / 7.1% YOY for the headline CPI and 0.5% MOM and 5.4% for the CPI ex-food and energy.
Goldman is out with a call this morning calling for 4 rate hikes in 2022. The Fed Funds futures agree. “Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks,” Hatzius wrote. “We continue to see hikes in March, June, and September, and have now added a hike in December for a total of four in 2022.”
The central tendency is now for 4 rate hikes, although it is more or less a toss-up between 3 and 4.
Goldman also sees the central bank beginning the process of shrinking its balance sheet in July. It will probably do this by only reinvesting a portion of maturing assets back into the market. In other words, if $1 billion of MBS and Treasuries mature in a particular month, the Fed might buy $500 million and let the other $500 million “retire.”
Stocks are flattish after a disappointing payroll number. Bonds and MBS are down small. Global bond yields are rising as well, with the German Bund at nearly a 3-year high and threatening to crawl out of negative territory.
The jobs report was a bit of a mixed, bag, with payrolls coming in below 200k, which was about half of the expected number, and way lower than the 800k reported by ADP. On the bright side, the unemployment rate fell to 3.9%.
The labor force participation rate was steady at 61.9% and the employment-population ratio ticked up 0.2% to 59.5%. Average hourly earnings were up 4.7% YOY. So overall the internals of the report were good. The labor market is doing well, albeit we have fewer employed than before the pandemic.
The FOMC minutes touched on what might be going on – a lot of job losses are probably from early retirements. COVID’s mortality rate is a function of age, and perhaps many people in their early 60s decided to stop working instead of taking the risk of getting sick at the workplace.
The market is still digesting the FOMC minutes and the fact that the Fed is going to be a lot more hawkish. The change in sentiment is most evident in the March Fed Funds Futures, which are now predicting a 70% chance of a 25 basis point hike at the March meeting. A week ago, the market was predicting a a tossup, so this is a big shift.
Stocks are flattish this morning as global bond yields rise. Bonds and MBS are down.
The FOMC minutes were taken as bearish for bonds, and yields started creeping up after the release. It isn’t just the US – German, British and Japanese yields are up big as well. Here is the discussion of inflation:
Participants remarked that inflation readings had been higher and were more persistent and widespread than previously anticipated. Some participants noted that trimmed mean measures of inflation had reached decade-high levels and that the percentage of product categories with substantial price increases continued to climb. While participants generally continued to anticipate that inflation would decline significantly over the course of 2022 as supply constraints eased, almost all stated that they had revised up their forecasts of inflation for 2022 notably, and many did so for 2023 as well. In discussing their revisions to the inflation outlook, participants pointed to rising housing costs and rents, more widespread wage growth driven by labor shortages, and more prolonged global supply-side frictions, which could be exacerbated by the emergence of the Omicron variant. Moreover, participants widely cited business
contacts feeling confident that they would be able to pass on higher costs of labor and material to customers. Participants noted their continuing attention to the public’s concern about the sizable increase in the cost of living that had taken place this year and the associated burden on U.S. households, particularly those who had limited scope to pay higher prices for essential goods and services.
The FOMC also touched on an important point – that some of the factors that worked against inflation in the past – notably technology, globalization and productivity growth – might be diminishing. Currently wage growth is high while productivity is low. The Fed is especially worried that annual cost-of-living increases will begin to become a permanent part of the labor landscape, which will pull inflation above its 2% target.
The Fed also discussed balance sheet normalization. It is clear that they think the balance sheet is bigger than it should be, and they would like to wind it down at some point. They prefer to use the Fed Funds rate to manage the economy, given that they have more certainty about how it will work. In addition, their preference is to get rid of mortgage backed securities first. This is going to be a longer-term issue as they will probably first re-invest maturing proceeds to maintain the level of holdings, and then start to let them run off.
The FHFA announced new LLPAs for high balance and second homes yesterday. Upfront fees for high balance loans will increase between 0.25% and 0.75%, although first-time homebuyers with incomes at or below the area median income will have the fees waived. For second homes, the fees will be a function of LTV ratios, going from 1.125% to 3.875%. I have to imagine they are going to do something for investment property loans as well. On the bright side, this is a better approach than their previous attempt, which involved caps at the lender level.
We had some employment-related indicators this morning, which initial jobless claims back to pre-pandemic levels at 207,000. The Challenger and Gray job cut report showed 19,052 job cuts last month.
The ISM Services Index decelerated in December from its all-time high in November. Supply chain issues continue to be mentioned as a major constraint, along with rising prices and labor costs / supply.
Stocks are flattish this morning as we await the FOMC minutes this afternoon. Bonds and MBS are up small.
Mortgage applications fell 2.7% over the holiday week as purchases fell 4% and refis fell 2%. “Mortgage rates continued to creep higher over the past two weeks, as markets maintained an optimistic view of the economy,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance demand continues to dwindle, as many borrowers refinanced in 2020, and in early 2021 – when mortgage rates were around 40 basis points lower. The purchase market also finished the year on a slower note, with the final week coming in at the weakest since October 2021. Even though average loan sizes were lower, home price appreciation remains at very high levels.”
The ADP Employment report showed that 807,000 jobs were added in December. “December’s job market strengthened as the fallout from the Delta variant faded and Omicron’s impact had yet to be seen,” said Nela Richardson, chief economist, ADP. “Job gains were broad-based, as goods producers added the strongest reading of the year, while service providers dominated growth. December’s job growth brought the fourth quarter average to 625,000, surpassing the 514,000 average for the year. While job gains eclipsed 6 million in 2021, private sector payrolls are still nearly 4 million jobs short of pre-COVID-19 levels.” Note that the expectation for Friday’s jobs report is 400k, so there may be some upside there.
One of the leading dovish voices at the Fed, Neel Kashkari backs two rate hikes in 2022. He discusses the two “opposing forces” that the Fed needs to balance going forward – the first, that inflationary expectations become built into the economy, and the second, that the economy returns to the slow-growth / low inflation state that has described the past 20 years.
He has a point in that the economy is basically being force-fed adrenaline with trillions worth of fiscal stimulus, and highly negative inflation-adjusted interest rates. Growth, at least according to the GDP numbers is ok, however it should be rip-roaring given this unprecedented amount of stimulus. Economists are well aware that stimulus has diminishing returns – they call it pushing on a string – and we may well be at this point. Which means that when the sugar high dissipates the economy returns to mediocre growth, albeit with higher inflation.
As of now, the market consensus is that we will see a total of 75 basis points in rate hikes next year:
Stocks are higher this morning despite the backup in rates. Bonds and MBS are down.
Is inflation beginning to moderate? According to the latest ISM Manufacturing Index, prices paid fell from a net 84.2% to 68.2%. This is a survey-driven number, so accept it for what it is however this is at least the first indication that supply chain issues are beginning to ease up. Demand is still strong, which is a good sign, and employment rose as well.
Job openings decreased to 10.6 million in November, according to the JOLTS jobs report. Most of the decrease was in the leisure and hospitality sector. The quits rate increased to 3%, which matched the series high set last September. The quits rate is a good predictor of future wage inflation.
The Fed is looking at balance sheet reduction as another way to combat rising inflation. Prior to the pandemic, the Fed tried to reduce its holdings of Treasuries and mortgage backed securities, however it found that the economy was too weak to withstand it. Inflation was running below the Fed’s 2% target, and the central bank was worried about the economy slipping into disinflation, if not outright deflation.
The situation today is much different. Inflation is running above the Fed’s target, and the labor market is much stronger. In mid-December, Jerome Powell said: “This is just a different situation, and those differences should inform the decisions we make about the balance sheet at this time.”
Strategists are lobbing in their forecasts for rates next year. Bankrate sees the 30 year mortgage rate hitting 3.75% next year before falling to 3.5%. The MBA sees the 30 year fixed rate hitting 4%. Everyone agrees that 2022 will be a purchase-driven market as rate / term refi activity dries up.
Home price appreciation hit 18.1% in November, according to CoreLogic. Lower-priced homes are seeing the fastest appreciation. Arizona, Florida and Idaho all experience 25%+ growth. Separately, affordability has fallen below historical average, according to ATTOM. Home ownership costs on the typical home constituted 25.2% of the average wage in the fourth quarter, up from 24.4% in Q3 and 24.1% last year. That said, the labor market is tight and wages are rising.
Stocks are higher as we kick off the new year. Bonds and MBS are down.
Investors are returning to a market dominated by increasing COVID infections and the specter of inflation and a tightening cycle. For the mortgage business the focus will be on taking share in a shrinking market. Rate and term refis will fade into the background and purchase activity will be the focus. Cash-out refis will be another good source of business, along with investor activity.
The upcoming week will be dominated by the jobs report on Friday. We will also get the ISM surveys and the FOMC minutes. We are starting the new year with bonds getting slammed. It isn’t just in the US – German yields are up big as well.
73% of homebuyers and sellers say that inflation is influencing their buying and selling decisions, according to a survey from Redfin. “The way Americans interpret news about rising prices can have a variety of effects on their financial decisions, including homebuying,” said Redfin Chief Economist Daryl Fairweather. “Some people may delay buying because they’re worried that with prices rising on everything from food to fuel, now is not the right time to make a huge purchase. But others might move faster to find a house because they’re worried home prices and rent prices will increase even more, and they want to lock in a fixed payment.”
Construction spending rose 0.4% MOM and 9.3% YOY. Residential construction rose 0.9% MOM and 16.1% YOY. Housing start should, in theory, be a big driver of the economy in 2022. Lumber prices and skilled labor will be the big constraints.
Stocks are marginally higher this morning in thin holiday trading. Bonds and MBS are down.
Pending Home sales fell 2.2% in November, according to NAR. “There was less pending home sales action this time around, which I would ascribe to low housing supply, but also to buyers being hesitant about home prices,” said Lawrence Yun, NAR’s chief economist. “While I expect neither a price reduction, nor another year of record-pace price gains, the market will see more inventory in 2022 and that will help some consumers with affordability. Buyer competition alone is unrelenting, but home seekers have also had to contend with the negative impacts of supply chain disruptions and labor shortages this year,” he said. “These aspects, along with the exorbitant prices and a lack of available homes, have created a much tougher buying season.”
It looks like Biden will choose Sarah Raskin as the Federal Reserve head of banking regulation. After his disastrous experiment with Saule Omarova as head of the OCC, the worry was that he would nominate some other academic oddball to the Federal Reserve. Raskin has been a Fed governor in the past, so she at least has some relevant experience. She is also a sop to Biden’s progressive flank who didn’t want to see Jerome Powell get re-nominated.
Stocks are higher this morning as the S&P 500 hits records into the end of the year. Bonds and MBS are up small.
Home prices rose 17.5% YOY in October, according to the FHFA House Price Index. “House price levels continue to rise but the rapid pace is curtailing through October,” said Will Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “The large market appreciations seen this spring peaked in July and have been cooling this fall with annual trends slowing over the last four consecutive months.”
Separately, the Case-Shiller Home Price Index showed prices increasing by 18.5% YOY.
The rise in home prices and rates does raise big questions regarding affordability. Home price appreciation aside, the expected increase in mortgage rates will negatively affect affordability. That said, affordability is a function of incomes too, and wages are rising at a decent clip.
The consensus for mortgage rates next year is that they are expected to be around 3.7% or so (an increase of 40 bps). Wage inflation is running at a 5% clip. Interestingly, if you calculate the debt-to-income ratio for the median home price / median income at 3.3%, you get .282 (I am ignoring downpayment, fees, etc – just rough math). If you increase the median income by 5% and increase the mortgage rate to 3.7%, you get a DTI of .282. So wage growth is pretty much offsetting the effect of rising mortgage rates.
Theoretically, this means that home price appreciation should slow given that rising prices throw a wrench in that calculation. And that is probably driving the forecasts that home price appreciation will slow to almost nothing next year. The one thing I would say is that while individuals are subject to DTI requirements, big institutional money is not, and given the paltry yield alternatives out there they will continue to have an appetite for single family rentals.
The other issue is simply the stark supply and demand imbalance, driven by years of gun-shy homebuilders. COVID-19 driven shortages might keep the builders from meeting demand in the short term, however homebuilding will eventually catch up. In the commodities markets, there is a saying: the cure for high prices is high prices. Eventually greed will win out over fear for the builders and supply will increase.
Stocks are higher this morning on no real news. Bonds and MBS are flat.
The upcoming week should be relatively quiet as many participants are on vacation or taking some time off. Economically, we don’t have much in the way of market-moving data, although we will get home price data tomorrow and pending home sales on Wednesday. The bond market will close early on Friday.
The markets are relatively sanguine over Omicron. While the variant is supposedly not as deadly as other variants, it is causing staffing shortages, and it caused about 1,000 flights to be canceled over the weekend. I suppose in the short term, this will cause additional supply chain bottlenecks which will bump up inflation.
Crypto.com will be running super bowl ads this year. I wonder if this marks some sort of top in cryptocurrencies in general. Historically, super bowl advertising has been dominated by consumer products like snacks and beer or cars. However, you do tend to see interlopers at the height of a bubble or boom. In 2006, mortgage companies were big advertisers in the super bowl. In the late 90s, it was dot.com flameouts.
In 1999, internet holding company CMGI (who’s only business was a minority stake in erstwhile search engine Lycos) bought the rights to rename Foxboro stadium to CMGI stadium. In 2001, after the bloom came off the internet bubble rose, CMGI was relegated to the pink sheets (think of it as skid row for stocks) and traders joked that the stadium should be renamed CMGIQ Stadium to represent the company’s new digs in the trash heap of bygone high-flyers.
Stocks are flattish this morning on the last trading day before a long weekend. Bonds and MBS are flat as well.
Personal incomes rose 0.5% in November, and personal consumption expenditures rose 0.6%. Both numbers were a decrease from October and came in below expectations.
The PCE Price index rose 5.7% on a headline basis and 4.7% if you strip out food and energy. The PCE inflation index is the Fed’s preferred measure of inflation, so it is running hot.
The MBA is out with their latest forecast for 2022. Here are the main highlights:
Purchase originations will rise from $1.6T to $1.7T
Refinance originations will fall from $2.3T to $.9T
30 year fixed rate mortgage will rise from 3.1% to 4%
Home price appreciation will fall form 16% to 5%
Housing starts will rise from 1.6MM to 1.7MM
Initial Jobless Claims came in at 205k. We are back more or less to pre-pandemic levels.
New Home Sales rose to an annualized pace of 744k last month, according to Census. This was a touch below expectations, although this number is historically quite volatile with large sampling errors.
Regarding new home sales, I find the MBA’s forecast of housing starts maintaining current levels to be pessimistic. Historically, housing starts have been around 1.5 to 1.6 million, however we have seen starts spike well above 2 million several times. Given the supply and demand imbalance, I wouldn’t be surprised to to see starts hit those sorts of levels in the next few years, especially if commodity prices decline and more younger workers enter the skilled trades.
Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojkt
All Things in Moderation 