All Things in Moderation

Vital Statistics:

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are up for once.

Jerome Powell’s speech yesterday was interpreted as hawkish despite some sentences that could be considered dovish.

Turning to monetary policy, the FOMC has tightened policy substantially over the past 18 months, increasing the federal funds rate by 525 basis points at a historically fast pace and decreasing our securities holdings by roughly $1 trillion. The stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation. Given the fast pace of the tightening, there may still be meaningful tightening in the pipeline.

My colleagues and I are committed to achieving a stance of policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.

Along with many other factors, actual and expected changes in the stance of monetary policy affect broader financial conditions, which in turn affect economic activity, employment and inflation. Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.

Unfortunately, bond market sentiment is so awful right now that even neutral data / comments is considered bearish. This is often typical at the end of bear markets. The markets seemed to seize on the comment that “monetary policy is not too tight right now.”

The last month has seen an extraordinarily heavy amount of US issuance ($580 billion in the past 30 days) which works out to be an annualized pace of $6.9 trillion or about 3.8x 2022 issuance. The last month’s issuance probably won’t be repeated, although it pushed 10 year yields to multi-decade highs.

The punchline: As long as the economy keeps slowing, the Fed is done. If that changes they might have to hike some more.

The Atlanta Fed’s GDP Now estimate for Q3 is still above 5%. To me that doesn’t square with any of the other data we are seeing (Beige Book, ISM, consumer sentiment) but it has remained exceptionally high ever since a meh housing starts number in mid-August. I wonder how much this model is influencing the Fed and whether something is off – 5.4% GDP growth is ridiculously high, and the economy doesn’t feel ridiculously strong.

Western Alliance announced earnings yesterday which came in above expectations. EPS was up marginally from Q2, but down YOY based on higher interest expense and non-interest expense. Tangible book value per share increased on a QOQ basis. Provisions for credit losses decreased while charge offs increased slightly.

The office portfolio consisted of about 5% of loans, in mainly suburban locations. Only 6% of the portfolio has an LTV over 70. The conference call is at noon today, however the stock was up 3% in the aftermarket.

Job cuts continue in banking, with the top 5 lenders cutting 20,000 jobs so far this year. Wells and Goldman have led the charge.

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Vital Statistics:

Stocks are lower as bonds continue to be for sale. Bonds and MBS are down. We have 5 Fed speakers today, so it will be interesting to see if they address the carnage in the bond market.

Housing starts rose 7% MOM to a seasonally annual adjusted rate of 1.36 million. This is down 7.2% compared to a year ago. Building Permits fell 4.4% MOM and 7.2% YOY to a seasonally adjusted annual rate of 1.54 million.

Mortgage Applications fell 6.9% last week as purchases fell 6% and refis fell 10%. Note that last week was short due to the Columbus Day Holiday. “Applications decreased to their lowest level since 1995, as the 30-year fixed mortgage rate increased for the sixth consecutive week to 7.70 percent – the highest level since November 2000,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Both purchase and refinance applications declined, driven by larger drops for conventional applications. Purchase applications were 21 percent lower than the same week last year, as homebuying activity continues to pull back given reduced purchasing power from higher rates and the ongoing lack of available inventory. The ARM share was 9.3 percent, the highest share in 11 months, as some borrowers look for alternative ways to lower their monthly payments. Refinance activity was at its lowest level since early 2023. There is very limited refinance incentive with mortgage rates at multi-decade highs.”  

A homebuyer must earn at least $115,000 to afford the median home, according to Redfin. This is up 15% compared to a year ago. Wage growth has been around 5% over the past year, so the affordability issue is brutal. The typical mortgage payment is $2,866 which is an all-time high.

“In a homebuyer’s ideal world, rising mortgage rates would push demand and home prices down enough to make up for high interest payments. But that’s not what’s happening now: Although new listings are ticking up slightly, inventory is still near record lows as homeowners hang onto their low mortgage rates–and that’s propping up prices,” said Redfin Economics Research Lead Chen Zhao. “Buyers–particularly first-timers–who are committed to getting into a home now should think outside the box. Consider a condo or townhouse, which are less expensive than a single-family home, and/or consider moving to a more affordable part of the country, or a more affordable suburb.”

Philly Fed President Patrick Harker is ready to stop the interest rate hikes. “This is a time where we just sit for a little bit. It may be for an extended period; it may not. But let’s see how things evolve over the next few months.” On the subject of rate cuts, he said: “We’re not there yet, but we believe in lags,” he said. “So if we get into the range of, I don’t know, let’s call it 2.5%, [and] we’re continuing to move down, then something like that would at least have me considering whether or not it’s time for rates to start coming down.”

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ital Statistics:

Stocks are higher this morning as investors focus on the Middle East. Bonds and MBS are down as investors fret about the hot CPI report last week. Many in the mortgage business will be at the MBA Annual in Philly.

The upcoming week will have a lot of housing data with housing starts, the NAHB Housing Market Index and existing home sales. We will also get industrial production and leading economic indicators. There will be plenty of Fed speakers with Jerome Powell speaking on Thursday.

The Biden Administration is talking about housing. Steps being taken include allowing FHA borrowers to count rental income from accessory units, new support for VA borrowers who become delinquent, expanded USDA loan access and updating 203k loans. The Administration might also want to address the alarming number of buybacks coming from Fannie and Freddie.

In my latest Substack post, I ask if we had a bubble in sovereign debt and compare the carnage in the bond market to the aftermath of the stock and real estate bubbles. Mohammed El-Arian said that this bond market is the worst in 150 years. Indeed, if you bought the 30 year Treasury in April of 2020, you would have lost 50% of your money at this point. Check it out and please consider subscribing.

Housing affordability is at an all-time low in the US. This is driving home sales to their lowest level since the real estate bust of 2008. Redfin forecasts existing home sales to come in at 4.1 million this year, the lowest level since 2008.

Given the rate-lock in effect, the only thing that can square the circle is increased building.

Filed under: Economy | 19 Comments »

Vital Statistics:

Stocks are higher this morning despite a stronger-than-expected CPI print. Bonds and MBS are down.

The consumer price index rose 0.4% month-over-month and 3.7% year-over-year, which was a touch above Street expectations. The core rate, which excludes food and energy, rose 0.3% MOM and 4.1% YOY, which was in line with expectations.

“US Core inflation came in line while headline measures were higher than consensus forecasts,” Mohamed El-Erian stated. “Together with relatively low weekly jobless claims of 209,000, the immediate market impact will be some upward pressures on market yields. Analytically, it is a reminder of the challenges of the ‘final mile’ of battling inflation, especially when core service inflation remains high and there is concern about the spillover into core CPI from higher energy prices.”

Shelter was the biggest contributor to the increase, with gasoline close behind. Shelter inflation rose 0.6% MOM and 7.2% YOY, the biggest increase since May. The shelter component presents a problem for the Fed in that prices are being driven by super-low supply, and I don’t see how an additional 25 basis points on the Fed Funds rate can affect that. The only thing that can fix the shelter issue is more homebuilding.

Other big increases in inflation include auto insurance (+18.9%), auto repair (+10%), transportation (+9.1%), and food away from home (+6%).

The labor market remains resilient, with only 209,000 initial unemployment claims. Separately, the United Auto Workers is extending its strike to a Ford truck plant in Kentucky.

The FOMC minutes were released yesterday. “A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted….Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two sided….Participants generally noted that it was important to balance the risk of overtightening against the risk of insufficient tightening.”

Bond yields generally worked their way lower after the FOMC minutes. The Fed Funds futures took down their bets on a November tightening to below 10% and while the probability of a tightening by the December meeting remained around 26%.

The minutes mentioned that bank credit was tightening somewhat: Bank credit conditions appeared to tighten somewhat over the intermeeting period, but credit to businesses and households remained generally accessible. Check out the YOY change in bank credit, seems a bit more than just “tightening somewhat.” – first YOY decline since the Great Recession.

One explanation is that everyone over-borrowed when rates were 0% and don’t need to borrow now that rates have increased. Or it could mean that the problems in commercial real estate are beginning to affect the supply of credit.

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Earnings season kicks off tomorrow with the big banks reporting. Expect to see continued pressure in the regional banking space. “The acute phase of bank stress is clearly over, but in its wake several challenges have become exacerbated including funding challenges, balance sheet constraints, dampened loan demand, and potential negative credit migration as commercial real estate (CRE)] maturities are dealt with,” Wedbush analyst David Chiaverini wrote in a note. “We expect another underwhelming quarter for banks given the macro backdrop.”

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Vital Statistics:

Stocks are flattish this morning as the bond market re-opens after a long weekend. Bonds and MBS are up.

We don’t have a ton of data this morning, but we do have a lot of Fed-speak with Raphael Bostic, Neel Kashkari, Christopher Waller and Mary Daly all speaking today.

The weekend terrorist attack by Hamas had a muted impact on the US equity markets and is providing a flight to safety in the bond market. So far, it seems to be having an muted impact on oil prices. While international instability usually causes interest rates to fall, the strong labor market is the biggest factor and will probably remain so, especially after Friday’s big number.

The Mortgage Bankers Association, the National Association of Realtors and the National Association of Homebuilders sent a letter to the Fed, urging them take actions to support housing and the mortgage market. Increased uncertainty about monetary policy have pushed out MBS spreads and increased interest rates.

They point out that shelter accounted for 90% of the increase in consumer prices during the month of July and that the best way to attack housing costs is to help facilitate new home construction.

The consortium urges the Fed to commit to ending rate hikes and to stop letting its MBS portfolio run off until MBS spreads have stabilized. I suspect wide MBS spreads are due more to bond market volatility than to QT. MBS spreads weren’t materially different from historical levels during the era of QE, so I don’t see why QT (which is much smaller in scope) would matter. MBS spreads are being driven by bond market volatility, and I suspect an all-clear signal out of the Fed would go a long way towards stabilizing them.

Small Business Optimism slipped in September, according to the NFIB. This was the 21st consecutive month with the index below the historical average. Inflation and labor shortages were the biggest drivers of the decrease. Small Business owners were increasingly pessimistic about the outlook six months out.

Consumption remains strong as consumers spend on credit, while small business is dealing with a tight labor market: ” They raised labor compensation at record rates to keep workers and fill open positions which are at record high levels. To manage rising labor, energy, and other costs, they raised prices at record high rates and continue to do so, adding to inflation pressures. But they are investing in their firms at historically low rates, primarily because capital spending is financed from the bottom line, and profits have been squeezed by rising input and labor costs and regulatory compliance. Interest rates on their loans have more than doubled and financing is harder to get now.”

Chinese real estate developer Country Garden defaulted on a HK dollar denominated loan. Sales have collapsed, with the first three quarters of 2023 down 44% from the previous period, and September sales down a whopping 81%. The developer has $187 billion in liabilities.

IMO this remains the biggest black swan event in the financial markets. I find it highly unlikely that the world’s second biggest economy could have a Great Depression-esque real estate implosion without any negative credit consequences outside of its country. Western investors and banks will lose money, and that might be the catalyst for the Fed to cry uncle.

Housing sentiment remains dour, according to the Fannie Mae Home Purchase Sentiment Index. “Mortgage rates persistently over 7 percent appear to be deepening the malaise consumers feel about the home purchase market,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “In fact, high mortgage rates surpassed high home prices as the top reason why consumers think it’s a bad time to buy a home, a survey first. Notably, the share of consumers expressing pessimism about homebuying conditions hit a new survey high in September, with 84% now indicating that it’s a bad time to buy a home.”

Filed under: Economy | 25 Comments »

Vital Statistics:

Global sovereign bond yield continue there relentless march higher, with the 10 year approaching 4.9% in the overnight session. We are seeing a bit of a reprieve this morning after the weak ADP print.

The bond sell-off is global, with the Japanese Government Bond yield breaking through 0.8% and the German Bund touching 3%.

The economy added 89,000 jobs in September, according to the ADP Employment Report. “We are seeing a steepening decline in jobs this month,” said Nela Richardson, chief economist ADP. “Additionally, we are seeing a steady decline in wages in the past 12 months.” Interestingly, we saw a decrease in professional / business services, which saw the biggest increase in job openings in yesterday’s JOLTS report. Pay growth for job stayers decelerated to 5.9% while pay growth for job changers decelerated to 9%.

Mortgage applications fell 6% last week as purchases fell 5.7% and refis fell 6.6%. The applications index hit the lowest level since 1996. “Mortgage rates continued to move higher last week as markets digested the recent upswing in Treasury yields. Rates for all mortgage products increased, with the 30-year fixed mortgage rate increasing for the fourth consecutive week to 7.53 percent – the highest rate since 2000,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “As a result, mortgage applications grounded to a halt, dropping to the lowest level since 1996. The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market. ARM loan applications picked up over the week and the ARM share increased to 8 percent, as some borrowers searched for ways to lower their payments.”

Atlanta Fed President Raphael Bostic sees only one rate cut in 2024. “I am not in a hurry to raise, but I am not in a hurry to reduce either,” Bostic said Tuesday at an event in Atlanta, referring to the US central bank’s benchmark interest rate. “I want us to hold. I think that’s the appropriate thing to do, for a long time.” He has been one of the more dovish Fed Presidents.

A last-minute bipartisan budget agreement was reached over the weekend, which kept the Federal Government and the National Flood Insurance Program (NFIP) operating for another 45 days into mid-November.  While the NFIP has measures which prevent a true lapse in the case of a government shutdown, it is smart for lenders to understand how to address flood insurance in case a shutdown occurs. A lender can place the insurance application in the borrower’s file as proof and move forward with closing. Alternatively, lenders can purchase WYO of Private Flood Insurance. Pinnacle Property Data is a boutique vendor management company that specializes in flood certifications and offers flood certifications from ServiceLink National Flood. They work with many of the largest lenders in the industry to reduce costs on flood certifications and provide unique value add products for free. Pro tip: Have your loan officers get flood insurance requirement data for free and if flood insurance is required, get an instant quote here https://pinnacle.rocketflood.com/ . Now is the time to look at process improvements and efficiencies! Contact us today to see how we can save you money on your flood certification program! 602-561-6791 or sasha@pinnpropdata.com

The services economy expanded in September, albeit at a slower rate, according to the ISM Services Index. There has been a slight pullback in the rate of growth for the services sector, which is attributed to slower rates of growth in the New Orders and Employment indexes. The majority of respondents remain positive about business conditions; moreover, some respondents indicated concern about potential headwinds.” Employment growth decelerated, while pricing was flat on a month-over-month basis.

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Vital Statistics:

Stocks are lower this morning as rates continue to rise. Bonds and MBS are down.

I think most investors are happy to see September (and Q3 in general) in the rear view mirror. Most asset classes lost money in September, with stocks posting their worst month this year. Bond yields spiked and about the only sector that worked was energy.

The government came up with a deal to prevent a shutdown. The deal funds the government through early November. The deal did not include any spending cuts however it didn’t include any further aid for Ukraine either. Judging by the yield on the 10 year, it wasn’t shutdown fears that were pushing rates higher.

The upcoming week will be dominated by employment data, culminating with the jobs report on Friday. The consensus is that the economy added 160,000 jobs in September, and the unemployment rate ticked down to 3.7%. Average hourly earnings are expected to have risen 4.3% on a year-over-year basis. We also get the ISM reports.

Rithm Capital (parent of NewRez and Caliber) announced the purchase of Specialized Loan Servicing and other assets from Computershare for $720 million. The deal includes about $136 billion in MSRs. “The addition of SLS continues to grow our best-in-class special servicing business and adds more clients and homeowners to the Newrez platform,” said Baron Silverstein, President of Newrez. “It further strengthens our origination and servicing channels, both of which are designed to deliver a customer experience that prioritizes a successful homeownership journey.”

Manufacturing activity contracted in September for the 8th consecutive month, according to the ISM Survey.  “The U.S. manufacturing sector continued its contraction trend but at a slower rate, recording its best performance since November 2022, when the PMI^® also registered 49 percent. Companies are still managing outputs appropriately as order softness continues, but the month-over-month PMI^® improvement in September is a clear positive. Demand eased marginally, with the (1) New Orders Index contracting, though at a slower rate, (2) New Export Orders Index continuing in contraction territory but with a marginal increase, and (3) Backlog of Orders Index declining. The Customers’ Inventories Index reading indicated improved supply chain efficiency, as output improved and customers’ inventories continued to decline. Output and Consumption (measured by the Production and Employment indexes) was positive, with a combined 5.2-percentage point upward impact on the Manufacturing PMI^® calculation. Panelists’ companies improved production compared to August and continued to manage head counts, primarily through attrition and hiring freezes. Inputs — defined as supplier deliveries, inventories, prices and imports — continued to accommodate future demand growth. The Supplier Deliveries Index indicated faster deliveries for the 12th straight month, at a faster rate compared to August, and the Inventories Index remained in contraction territory, but improved month over month. The Prices Index remained in ‘decreasing’ territory, 4.6 percentage points lower than the August reading, signifying a return to price reductions, but energy costs in August and September could possibly affect future material costs. Manufacturing supplier lead times continue to decrease, but at a slow pace.

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Vital Statistics:

Stocks are higher this morning as we round out September. Bonds and MBS are up after an awful month for the asset class.

It is looking more and more like we might get a government shutdown over the weekend. These things generally are more symbolic than anything because the vast majority of government spending is on autopilot and immune to a shutdown. For most people the only impact is that the Park Service closes down the monuments in DC.

Personal Incomes rose 0.4% MOM in August, according to the BEA. Personal incomes were driven upward by increased compensation and investment income. Personal spending rose 0.4%, which was a big deceleration from the July number of 0.9%.

The PCE Price Index rose 0.4% MOM and 3.5% YOY. If you exclude food and energy the PCE Price Index rose 0.1% MOM and 3.9% YOY. The annual increase in the core PCE was the lowest since June of 2021.

The inflation numbers were a touch below expectations, although we will get plenty of additional data before the November FOMC meeting.

Delinquencies on consumer loans are ticking up. 30-60 day DQs rose to 0.84%, an increase from 0.65% a year ago. We are seeing DQs rise across the board, with credit cards and auto loans leading the way.

Mortgage delinquencies are still near record lows, however. “Overall U.S. mortgage delinquencies remained near a record low in July, with the share of homes entering that status or progressing to later stages either unchanged or lower. Since most borrowers have substantial amounts of home equity, those who have locked in low mortgage rates that do enter later stages of delinquency will most likely not experience foreclosures. And while home equity gains have slowed from their former rapid pace, CoreLogic projects that home price growth will pick up over the next year. Borrowers should continue to build equity over the coming months, even if at a more moderate rate.”

Consumer sentiment decreased in September, according to the University of Michigan Consumer Sentiment Survey. Importantly, inflationary expectations continue to moderate, with year-ahead inflation declining to 3.2% from 3.5% and long-run inflation declining to 2.8%. The long-run rate had been stuck in a 2.9% – 3.1% range ever since the pandemic, so this is a good sign.

We are still above pre-pandemic levels with inflationary expectations. Prior to the pandemic, the two-year average for 2.3% – 3% for the year-ahead number and 2.2% – 2.6% for the long-run number. This is good news, however rising energy prices are going to support the headline number for a while.

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Vital Statistics:

Stocks are flat this morning on no real news. Bonds and MBS are down again. Jerome Powell will speak after the market closes.

It is looking more and more like we will get some sort of government shutdown soon. The last time we had a government shutdown, the IRS wasn’t sending out tax transcripts, which delayed some closings.

Global sovereign yields are shooting higher this morning, led by the UK, with an 18 basis point pickup. The German Bund yield is up 12 basis points despite a better-than-expected inflation report. Rising energy prices aren’t helping things, and all of this is translating into relentlessly higher Treasury yields and mortgage rates.

Bank earnings in a couple weeks will be interesting to say the least.

Gross Domestic Product rose 2.1% in the second quarter, in the third revision. Consumption was revised downward, while non-residential fixed investment was revised upward. The PCE Price index rose 2.5% in the second quarter, while the PCE Price Index ex-food and energy rose 3.7%. Separately, initial jobless claims fell to 204k.

Chicago Fed President Austan Goolsbee said “The Fed has the chance to achieve something quite rare in the history of central banks — to defeat inflation without tanking the economy.” He went on further to say: “The unwinding of supply shocks, the composition of demand returning to more stable patterns, and Fed credibility are central to why I think it might be possible today to reduce inflation while avoiding a deep recession.”

He also said that he is ready to change the focus of the Fed from “how high” the Fed Funds rate goes to “how long” it stays restrictive. Goolsbee is a voting member.

Pending Home Sales fell 7.1% in August, according to the National Association of Realtors. Year-over-year, transactions are down 18.7%. “Mortgage rates have been rising above 7% since August, which has diminished the pool of home buyers,” said Lawrence Yun, NAR chief economist. “Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets…The Federal Reserve must consider the sharply decelerating rent growth in its consideration of future monetary policy. There is no need to raise interest rates. “Moreover, the government shutdown will disrupt some home sales in the short run due to the lack of flood insurance or delays in government-backed mortgage issuance,” said Yun.

How buydowns can help improve the affordability problem.

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Vital Statistics:

Stocks are higher this morning on stronger-than-expected durable goods orders. Bonds and MBS are flat.

Durable Goods orders rose 0.2% in August based on higher defense spending. If you strip out defense spending, durable goods orders fell 0.7%. July’s numbers were revised downward. Non-defense core capital goods orders (which is a proxy for business capital investment) fell 2.9%.

Minneapolis Fed President Neel Kashkari said that a government shutdown / drawn-out strike with the UAW could act to lower inflation and reduce the need for the Fed to hike further. “If these downside scenarios hit the U.S. economy, we might then have to do less with our monetary policy to bring inflation back down to 2% because the government shutdown or the auto strike may slow the economy for us,” he said in an interview. “I’m not hoping for that, but there’s an interaction there.”

The Senate advanced legislation which could help prevent a government shutdown, however House Speaker Kevin McCarthy is still dealing with members who want increased funding for the border. Another major sticking point is funding for Ukraine.

Generally speaking these government shutdowns are more show than substance. The Park Service will close off some monuments in DC and that will be about it. They usually have little to no economic effect beyond pushing some growth from one quarter to the next.

Mortgage Applications fell 1.3% last week as purchases decreased 2% and refis fell 1%. “Mortgage rates moved to their highest levels in over 20 years as Treasury yields increased late last week. The 30-year fixed mortgage rate increased to 7.41 percent, the highest rate since December 2000, and the 30-year fixed jumbo mortgage rate increased to 7.34 percent, the highest rate in the history of the jumbo rate series dating back to 2011,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Based on the FOMC’s most recent projections, rates are expected to be higher for longer, which drove the increase in Treasury yields. Overall applications declined, as both prospective homebuyers and homeowners continue to feel the impact of these elevated rates. The purchase market, which is still facing limited for-sale inventory and eroded purchasing power, saw applications down over the week and 27 percent behind last year’s pace. Refinance activity was down over 20 percent from last year and accounted for approximately one third of applications. Many homeowners have little incentive to refinance.”

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