All Things in Moderation

Vital Statistics:

Stocks are higher on follow-through after yesterday’s inflation print. Bonds and MBS are closed for the Veteran’s Day holiday.

Yesterday’s lower-than-expected consumer price index ignited a powerful rally in stocks and bonds yesterday. Now that we have had a day to settle in, let’s take a look at the Fed Funds futures.

The December 2022 FF futures now see a 85% chance of a 50 basis point hike and a 15% chance of a 75 basis point hike. If we hike 50 basis points, then the Fed Funds target rate will be between 4.25% and 4.5%. The December 2023 Fed Funds futures have a wide range of possibilities, however the central tendency is for the final Fed Funds rate to be between 4.25% and 4.5%. The second most common bet is between 4.5% and 4.75%.

Assuming these forecasts are correct, it would mean that the Fed should signal that its dramatic series of rate hikes is finished, and it will wait to see how the data shakes out. We will get one more PCE report and one more CPI report before the December meeting.

Mortgage related stocks were elated on the news yesterday. Mortgage REITs like Annaly Capital jumped 10%. AGNC Investment rose by a similar amount. Originators like Rocket rose 11%. Don’t forget that MBS spreads are extremely wide compared to historical levels. MBS spreads have been pushing 2%, while the historical norm has been around 80 basis points. This means that if the 10 year stays here, at say 3.8%, and MBS spreads return to normal, that would mean mortgage rates can fall another 100 basis points from here, which would imply a sub 6% mortgage rate.

A sub 6% mortgage rate probably won’t move the needle on the refi market, but it will do a lot on the affordability front. That said, there is a psychological anchoring effect going on, where people remember rates above 7% and will think a rate with a 5% handle is low. Given that HELOCs are still not being offered by a lot of big lenders, the cash-out debt consolidation loan could become in vogue again.

While there is lots of talk about a potential recession, the Atlanta Fed’s GDP Now forecast sees 4% growth in the fourth quarter. This would be extremely rapid growth, however it seems out of step with other forecasts.

This seems surprising given that we are seeing layoff announcements from companies like CH Robinson, which is a logistics company that is sort of a barometer of overall growth. Amazon is looking at cutting costs, which seems strange given that we are heading into the holiday shopping season. I am wondering if the Atlanta Fed is getting some sort of strange reading based on the dollar or inventory build and this will get revised downward later.

Consumer sentiment fell in November, according to the University of Michigan Consumer Sentiment Index. Sentiment for durable goods fell pretty dramatically. Inflationary expectations were unchanged, which is good news for the market, with short run expectations coming in around 5% and longer-term expectations at 3%. Sentiment fell 8.7% compared to October and 19% from a year ago. This is yet another data point that doesn’t square with the Atlanta Fed forecast.

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Vital Statistics:

Stocks are higher this morning after the consumer price index came in lower than expected. Bonds and MBS are up.

The consumer price index rose 0.4% MOM in October, according to the Bureau of Labor Statistics. On an annual basis prices rose 7.7%. The core rate of inflation (stripping out food and energy) rose 0.3% MOM and 6.3% YOY.

About half of the increase in CPI was due to shelter. Insurance, new vehicles and recreation were also contributors on the plus side. Used cars, medical care, airline fares and apparel were negative contributors. The year-over-year increase in the headline number was the lowest since January 2022.

It does look like we are beginning to trend downward in the overall month-over-month changes which is good news. Of course one data point isn’t going to change the Fed’s thinking all that much, but I suspect this puts to rest the steady diet of 75 basis point increases in the Fed Funds rate.

The initial reaction in the Fed Funds futures market is to increase the chances of a 50 basis point hike next month to 80% versus 58% yesterday.

The December 2023 Fed Funds futures are now circling around an end of year Fed Funds rate of 4.5% – 4.75%. This would mean that maybe we get 50 basis points next month, and then another 25 in early 2023. The thing I wonder about is shelter, since it can be persistent. If we look into next year and most inflation is back to normal with the exception of shelter, does the Fed still maintain a tight policy stance? Much of the shelter component is owner-equivalent rent which isn’t a “cost” in that it isn’t something you write a check for, at least if you are a homeowner. It is more or less an abstract concept.

The inflation print caused the 10 year bond yield to drop about 20 basis points, and put about 100 points on the S&P 500 futures. I wonder if the bond market reaction was due to a lot of people leaning short after the lousy 10 year auction yesterday. We will have some Fed-speak later this morning (luckily not Neel Kashkari) so it will be interesting to hear what Mary Daly says about the CPI reading. Don’t forget the bond market is closed tomorrow.

Initial jobless claims rose to 225k last week. So far, the labor market is holding up, notwithstanding the parade of job cuts in the real estate industry.

Redfin has closed down its home flipping unit and laid off 13% of its staff. Both Opendoor and Zillow have struggled to make money monetizing their proprietary real estate valuation models by making bets in the real estate market. It is a capital-intensive business, and I suspect the special sauce is not the gee-whiz cool valuation models, but blocking and tackling – managing properties, doing fixes, and moving the merchandise. Don’t forget that rising rates have increased the carrying cost of these properties as well. Redfin hopes to liquidate its portfolio by the end of the year.

Filed under: Economy | 71 Comments »

Vital Statistics:

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

Mortgage applications fell 0.1% last week as purchases rose 1% and refis fell 4%. “Mortgage rates edged higher last week following news that the Federal Reserve will continue raising short-term rates to combat high inflation,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “The 30-year fixed rate remained above 7 percent for the third consecutive week, with increases for most loan types. Purchase applications increased for the first time after six weeks of declines but remained close to 2015 lows, as homebuyers remained sidelined by higher rates and ongoing economic uncertainty. Refinances continued to fall, with the index hitting its lowest level since August 2000.”

As refinances fade into the background, I suspect the seasonality of the mortgage business is going to become a lot more pronounced.

Stamford Connecticut based Luxury mortgage is pausing originations while it looks for a new partner. Starwood was in a deal to purchase the Connecticut lender however there have been reports that Starwood backed out of the deal.

Loan Depot reported earnings yesterday, narrowing is losses as it exits the wholesale business. The company also announced the launch of its digital HELOC program, which it hopes will drive earnings in 2023. As of now, the company is firmly in expense reduction mode.

Mortgage banks aren’t the only ones getting slammed these days. Fintech, which was once the darling of the stock market, is getting hit too. Redfin has sunk to fresh lows after Opco downgraded the stock and said its business model is “fundamentally flawed.” “We believe that Redfin’s business is fundamentally flawed, as the company continues to use a fixed-cost model for agents,” the analyst writes. “This prevents the company from optimizing margins when the housing markets decline and limits share gains when markets rebound.” 

Opendoor and Zillow are also announcing big layoffs.

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Vital Statistics:

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

Small Business Optimism declined again, according to the NFIB Small Business Optimism Index. Inflation and a tight labor market remain the biggest issues. The number of businesses reporting inflation is back to levels last seen in the late 1970s. Labor shortages are particularly acute in transportation, construction and manufacturing.

A net 50% of companies reported raising prices. Retailers and wholesalers most widely reported raising prices. “The frequency of reported price increases was highest in the retail trades, 69%, followed by 64% in wholesale, and 61% in construction. The other industry groups averaged about 50% raising prices, with the exception of professional services at 20%. Clearly, consumers are being confronted with inflation in every aspect of their lives. So far, inflation has been resistant to the impact of higher interest rates. If the Fed were a “fiscal” arm of government, it could just raise taxes on everyone for a short period of time to slow spending. But it can’t and must rely on the tenuous link between interest rates and spending. Major expenditures by consumers can be impacted (cars, houses, boats, etc.), a slow, erratic process. Firms are more directly impacted as the cost of loans (capital) rises, making more and more investment outlays unprofitable and thus impacting employment and income in affected sectors.”

The part about the cost of capital is important, because in a labor-constrained environment, investing in productivity-enhancing technology could help alleviate this issue. Productivity has been lousy, and low productivity has always been a driver of inflation. As borrowing costs rise, the rate of return on these investments has to rise as well, or else it isn’t worth doing.

Fannie Mae reported third quarter earnings this morning. Acquisition volume was down 32% to $117.7 billion. Purchase volume fell 17% while refi volume declined 58%. On the purchase side, about 45% were first time homebuyers. Delinquencies fell again to 0.69% as more borrowers exited forbearance.

Fannie Mae’s Home Purchase Sentiment Index hit an all-time low in October. The index only goes back to 2011, so it doesn’t capture the depths of the Great Recession. “The HPSI reached an all-time survey low this month, in line with expectations that the housing market will continue to cool in the months ahead,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “Consumers are increasingly pessimistic about both homebuying and home-selling conditions. Amid persistently high home prices and unfavorable mortgage rates, the ‘bad time to buy’ component increased to a new survey high this month, while the ‘good time to sell’ component continued its downward trend. Consumers also remain concerned about the movement of home prices – expectations that prices will decrease reached a new survey high, particularly among homeowners – offering further support to our forecast of home price declines in 2023. As continued affordability constraints reduce homebuyer demand, and homeowners become reluctant to sell at potentially reduced prices, we expect home sales to slow even further in the coming months, consistent with our forecast.”

Fannie Mae sees future declines in home prices and sales in the coming months. With refinances out of the picture, seasonality is going to have a bigger impact on origination volumes. We have a few months to go until the Spring Selling Season kicks off, which is usually around the time of the Super Bowl.

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Vital Statistics:

Stocks are higher this morning despite some disappointing news from some tech leaders like Meta and Apple. Bonds and MBS are down small.

The upcoming week will be dominated by the CPI print on Thursday. The Street is looking for a 0.7% MOM / 8% YOY on the headline number and 0.5% MOM / 6.6% on the CPI ex-food and energy. We will also get some Fed speak.

Midterm elections are on Tuesday, however I don’t see them as a market-moving event. Right now the story is all about the Fed.

Banks will be closed on Friday for the Veterans Day holiday.

Home prices fell 0.52% in September, according to Black Knight. This is of course pushing down home equity, which will probably have a negative effect on consumption going forward.

Underwater homes are a risk for those who bought at the top of the pandemic-driven peak (late 21 / early 22). That said, the number of underwater / under-equity properties is well below pre-pandemic levels. Black Knight estimates that roughly 3.6% of the 53MM mortgages outstanding in the US have 10% equity or less. Overall equity is still about $5 trillion above pre-pandemic levels, which works out to an average gain of $92,000 over that period.

With rising rates, the median monthly payment on a mortgage has risen $558, or about 40% since the beginning of the year. The MBA’s mortgage payment to rent ratio has been on a tear since rates began rising.

If you look at this chart, the natural conclusion would be that the first time homebuyer should rent because that is a better deal. Here is why that isn’t the case. Rents tend to lag home prices by about 21 months. Landlords reset the rent for an apartment upon renewal, however the big chunks happen when the tenant moves and the apartment gets set to market rents. So if home prices rise for a year, rent stays the same until the lease expires. Time lags explain this chart.

Note that for a first time homebuyer, the monthly payment on a fixed rate mortgage will stay the same for the term of the loan. Plus the first time homebuyer can deduct taxes. While this chart seems to imply that renting is more economical than buying, I personally think that is penny wise and pound foolish.

Filed under: Economy | 41 Comments »

Vital Statistics:

Stocks are higher after the jobs report. Bonds and MBS are up.

The economy added 261,000 jobs in October, which is more or less what we added in September. The unemployment rate ticked up to 3.7% from 3.5%, an indication that the Fed’s tightening is beginning to have some effect on the labor market. The labor force participation rate ticked down to 62.2%. Average hourly earnings rose 0.4% MOM and 4.7% YOY.

Rocket reported third quarter numbers. Volumes were down again – 26% QOQ and 71% YOY – to $25.6 billion. Gain on sale and earnings were again supported by servicing. The company is guiding for volume to slow again in Q4 (though seasonality is playing a part) to a range of $17 to $22 billion.

UWM reported third quarter earnings. Volumes increased from $29.9 billion to $33.5 billion. Gain on sale margins fell from 99 bps to 52 bps, but net income rose QOQ.

Guild Holdings reported Q3 numbers. In-house origination volumes were down 23% QOQ, however net income increased. Gain on sale margins were flat.

Freddie Mac is adjusting the way it calculates rates in its Primary Mortgage Market Survey. Freddie believes that its methodology contains sampling bias and it is working to fix that. FWIW, Freddie’s PMMS numbers have been a sticking point with borrowers and loan officers: “Freddie says rates are X% and we aren’t offering anything close to that!”

It sounds like Freddie will be using loan application data going forward instead of a survey. The biggest impact will be that points and fees will no longer be included in the rate data.

For those wondering, in the Morning Report, I use data from Optimal Blue to get the prevailing mortgage rate.

TIAA is getting out of the banking business. It will be selling TIAA Bank (which used to be known as Everbank) to a consortium of private equity funds and Bayview. The new name will be revealed soon.

Filed under: Economy | 36 Comments »

Vital Statistics:

Stocks are lower this morning after the Fed hiked rates yesterday. Bonds and MBS are down.

As expected, the Fed hiked rates by 75 basis points. The statement included language about the Fed taking into account lags and past rate hikes in order to assess the further course of monetary policy. In the immediate aftermath of the statement, stocks and bonds rallied on that statement as it seemed to indicate that the Fed was opening up the possibility of a pause in rate hikes.

The press conference poured cold water on that however, as Powell said it is “very premature” to be thinking about pausing and that “we have a ways to go on rates.” Stocks and bonds sold off for the rest of the day, and here we are this morning with the 10 year around 4.2%.

About the only positive was that Powell signaled that further rate hikes might be smaller. The December Fed Funds futures have a toss-up between 50 and 75 basis points. which would take us to about 4.5% on the Fed funds rate. Looking out to December of 2023, the futures see another 25 or 50 basis points of tightening in 2023.

Between now and December, we should get another two readings of the consumer price index and the PCE price index, so perhaps the data helps us out. I have to say I am utterly confused that the Fed would add the statement about taking into account lags and past hikes and then announce to the market that they are going to keep hiking. I mean, what’s the point of that statement? Seems strange, but that was one heck of a head fake to the stock and bond markets.

Productivity rose 0.3% in the third quarter, according to BLS. Output increased 2.8%, while hours worked increased 2.4%. Unit labor costs rose 3.5% as compensation rose 3.8% and productivity rose 0.3%. Lagging productivity has been an issue for a while, which has been contributing to inflation and lower standards of living.

Announced job cuts rose to nearly 30,000 in October, according to outplacement firm Challenger, Gray and Christmas. This was the highest level since February of 2021. Most of the cuts were in technology and the automotive sector. Construction jobs fell a we enter the seasonally slow period and are dealing with an affordability issue with housing. Despite the increase, initial jobless claims remain low at 217,000.

The services sector expanded in October, according to the ISM Services Index. That said, it decelerated from its September reading, indicating that the Fed’s rate hikes are beginning to have an effect. The one disappointment was that prices increased after 5 straight months of declines.

“Growth continues at a slower rate for the services sector, which has expanded for all but two of the last 153 months. The sector had a pullback in growth for the second consecutive month in October due to decreases in business activity, new orders and employment. Supplier deliveries continued to slow, at a faster rate in October. Based on comments from Business Survey Committee respondents, growth rates and business levels have cooled. There are still challenges in hiring qualified workers, and due to uncertainty regarding economic conditions, some companies are holding off on backfilling open positions. Supply chain and logistical issues persist but are not as encumbering as they were earlier in the year.”

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Vital Statistics:

Stocks are lower as we await the Fed decision. Bonds and MBS are flat.

The Fed decision is due today at 2:00 pm. The market expects to see a hike of 75 basis point, and there won’t be any new dot plot of set of projections. Jerome Powell will hold a press conference at 2:30 pm.

The economy added 239,000 jobs in October, according to the ADP Employment Report. The vast majority of the jobs were added in leisure / hospitality and trade / transportation. Manufacturing jobs fell. “This is a really strong number given the maturity of the economic recovery but the hiring was not broad-based,” said Nela Richardson, chief economist, ADP. “Goods producers, which are sensitive to interest rates, are pulling back, and job changers are commanding smaller pay gains. While we’re seeing early signs of Fed-driven demand destruction, it’s affecting only certain sectors of the labor market.

The number that jumped out at me was the increase in wages. From the report: “Job changers continued to record double-digit, year-over-year pay increases, but momentum in those gains is ebbing. For these workers, annual pay growth edged down for the third straight month, to 15.2 percent in October from 15.7 percent in September. For job stayers, pay gains were 7.7 percent, in line with recent months.”

This report seems way out of step with other reports on wage gains. FWIW, the market sees average hourly earnings increasing 4.7% in Friday’s jobs report, which is a far cry from the 7.7% reported here. Also this seems out of step with the employment cost index as well. If this report is true (especially for job stayers) then wage are more or less keeping up with core inflation (ex-food and energy).

Mortgage applications fell 0.5% last week as purchases fell 1% and refis fell 0.2%. The refi index is down a whopping 85% compared to a year ago. “The 30-year fixed rate decreased for the first time in over two months to 7.06 percent, but remained close to its highest since 2002,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “Apart from the ARM loan rate, rates for all other loan types were more than three percentage points higher than they were a year ago. These elevated rates continue to put pressure on both purchase and refinance activity and have added to the ongoing affordability challenges impacting the broader housing market, as seen in the deteriorating trends in housing starts and home sales.”

Home price appreciation decelerated in October, according the the Clear Capital Home Data Index. Overall home prices rose 0.5% quarter-over-quarter, and 12.6% on a year-over-year basis. Prices are beginning to soften dramatically on the West Coast, with areas like Seattle and the Bay Area falling in the mid-to-high single digit range. Rising prices and quality of life issues are causing people to exit these MSAs, and home prices are reacting accordingly.

Interestingly, the Northeast (which really missed this whole rally over the past few years) is beginning to exhibit decent growth. Places like Hartford CT and the NYC metro area were among the leaders. Florida remains the biggest beneficiary of migration as cities like Miami, Orlando and Tampa exhibited 25%+ growth.

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Vital Statistics:

Stocks are higher as we begin the Fed meeting. Bonds and MBS are up.

The Fed meeting begins today, and the focus will be on the pace of future rate hikes. The market is hoping that this meeting will be the last in the string of 75 basis point hikes. Generally speaking an increase of 50 basis points is considered to be an assertive move against inflation, while 75 basis points is pretty dramatic. We won’t get projections or a dot plot this meeting, so it all comes down to parsing the language in the press release and hanging on every word Jerome Powell says at the press conference.

The manufacturing economy barely expanded in September, according to the ISM Survey. The 50.2 reading is the lowest since May of 2020. Leading indicators such as new orders, are contracting.

“The U.S. manufacturing sector continues to expand, but at the lowest rate since the coronavirus pandemic recovery began. With panelists reporting softening new order rates over the previous five months, the October index reading reflects companies’ preparing for potential future lower demand. In the meantime, demand eased, with the (1) New Orders Index remaining in contraction territory, (2) New Export Orders Index below 50 percent for a third consecutive month and at a faster rate of contraction, (3) Customers’ Inventories Index remaining at a low level, with the same reading as in September and (4) Backlog of Orders Index slipping into contraction. Output/Consumption (measured by the Production and Employment indexes) improved month over month, with a combined positive 3-percentage point impact on the Manufacturing PMI^® calculation. The Employment Index shifted from contraction to a reading of 50 percent (unchanged), and the Production Index increased by 1.7 percentage points, staying in modest growth territory. Business Survey Committee panelists’ companies are continuing to manage head counts through hiring freezes and attrition to lower levels, with medium- and long-term demand still uncertain. Inputs — defined as supplier deliveries, inventories, prices and imports — mostly accommodated growth. The Supplier Deliveries Index indicated faster deliveries and the Inventories Index dropped 3 percentage points as panelists’ companies continued to manage the total supply chain inventory. The Prices Index decreased for a seventh straight month and fell into contraction territory, which should encourage buyers.

It is clear the Fed’s tightening regime is gaining traction, and the report of the Prices index falling into contraction is a leading indicator that inflation is being brought under control. The decrease in prices is being driven primarily by lower energy and metals prices.

Notwithstanding the ISM report, there were 10.7 million job openings at the end of September, according to the JOLTs jobs report. This partially offset a pretty big decline in August. Hires decreased to 6.1 million and the quits rate remained stuck at 2.7%

Construction spending rose 0.2% in September, which was up 10.9% year-over-year. Residential construction was flat.

Filed under: Economy | 8 Comments »

Vital Statistics:

Stocks are lower this morning as we start Fed week. Bonds and MBS are down.

The upcoming week will have a lot of market-moving events. The biggest event will be the FOMC meeting on Tuesday and Wednesday, with the Fed Funds futures handicapping a 86% chance of a 75 basis point hike and a 14% chance of 50. We will get the jobs report on Friday, along with the ISM data and productivity.

The government is beginning to worry about liquidity in the Treasury market. One of the problems with borrowing a lot of money is that you need to continue to attract a lot of money in order to roll over the maturing debt. The fear is that we could get some failed auctions. Part of this is being driven by the events in the UK, where yields on UK Gilts (The UK’s version of a Treasury) spiked some 120 basis points in the course of a few days.

The root of the buyers strike is due to a lot of things, but the ultimate reason is nothing more than price and value. With inflation running at anywhere between 5% to 6%, a 10-year Treasury paying 4% isn’t an attractive investment. Global central banks have engineered a bubble in sovereign debt, which is something I don’t think we have seen before. Central banks in general have only been around for about a century so this is all new territory.

Note that the Fed is now paying more in interest than it receives in income from its Treasury and MBS portfolio. The Fed pays all of its profit to Treasury, and now that it is running losses, it is accumulating an IOU. When the Fed starts earning profits again, those profits will pay off the IOU. The Fed also does not mark its portfolio to market, which is good news because it is probably a few hundred billion dollars underwater on its MBS portfolio.

Public interest lawyers are warning that the 5th Circuit’s ruling on the CFPB’s funding structure could upend the mortgage market. “The Fifth Circuit’s decision threatens to paralyze mortgage lending in Mississippi, Louisiana, and Texas because lenders will lose certainty about what law applies to future mortgages that they make,” McCoy said, referring to the states within the Fifth Circuit. She was part of the original leadership team at the CFPB during the Obama administration.

“We do like to settle rules that give us some safe harbors for the way that we make mortgages and we don’t want that to all go away,” Mortgage Bankers Association president and CEO Robert Broeksmit said Monday at the trade association’s annual convention. Still, he vowed to keep fighting what he called the bureau’s regulatory overreach. “Now is no time to make you hire more lawyers to try to understand what the bureau is doing.”

FWIW, the MBA believes this ruling would only affect payday lenders, however the CFPB’s days of being exempt from the appropriations process are probably over.

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