All Things in Moderation

Vital Statistics:

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

Consumer confidence fell in April, according to the Conference Board. “While consumers’ relatively favorable assessment of the current business environment improved somewhat in April, their expectations fell and remain below the level which often signals a recession looming in the short-term,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. “Consumers became more pessimistic about the outlook for both business conditions and labor markets. Compared to last month, fewer households expect business conditions to improve and more expect worsening of conditions in the next six months. They also expect fewer jobs to be available over the short term. April’s decline in consumer confidence reflects particular deterioration in expectations for consumers under 55 years of age and for households earning $50,000 and over.”

New Home Sales rose 9.6% MOM in March but were down 3.4% compared to a year ago. The median new home price was $449,800 which was up about 3% compared to a year ago.

House prices rose 0.5% MOM and 4% on a YOY basis according to the FHFA House Price Index. “U.S. house prices increased slightly in February,” said Dr. Nataliya Polkovnichenko, Supervisory Economist, in FHFA’s Division of Research and Statistics. “This increase was, in part, due to a decline in mortgage rates by more than half a percentage point from the peak reached in early November as well as historically low housing inventory.”

The Case-Shiller Home Price Index reported a 0.2% MOM gain in February, and a 2.0% annual increase. “The results released today pre-date the disruptions in the commercial banking industry which began in early March. Although forecasts are mixed, so far the Federal Reserve seems focused on its inflation-reduction targets, which suggests that interest rates may remain elevated, at least in the near-term. Mortgage financing and the prospect of economic weakness are therefore likely to remain a headwind for housing prices for at least the next several months.”

First Republic Bank is down about 30% this morning after disclosing that $70 billion in deposits fled the bank during the first quarter. This was a 35% drop. The bank has suspended its dividend on its common and preferred stock and is taking steps to reduce expenses.

Agency mortgage REIT AGNC Investment reported first quarter earnings yesterday. MBS spreads widened a touch compared to the end of 2022, however they remain tighter than the end of Q3 2022, which represented the widest since the 2008 financial crisis. Tangible Book Value per share fell from $9.84 to $9.41.

AGNC so far has managed to maintain its monthly $0.12 dividend while just about every other mREIT has been forced to cut theirs. Even if the Fed doesn’t pause next month, mortgage rates still can have some downside from tightening MBS spreads. Lower fixed income volatility will help things a lot.

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Vital Statistics:

Stocks are flattish this morning as earnings continue to come in. Bonds and MBS are down.

The week ahead will have a lot of economic data including house prices, new home sales, GDP and Personal Incomes / Outlays. The Personal Incomes / Outlays report on Friday will contain the Personal Consumption Expenditures index, which is the Fed’s preferred measure of inflation. There won’t be any Fed-speak as we are in the quiet period ahead of next week’s FOMC meeting.

The Fed Funds futures are pricing in a 90% chance of a 25 basis point hike next week. The June futures see a 25% chance for another 25 basis point hike, and the futures start pricing in rate cuts by the end of the year.

The market sees first quarter GDP at 2%. The Atlanta Fed’s GDP Now Index sees Q1 GDP at 2.5%. The Chicago Fed National Activity Index showed the economy growing at a below trend pace in March, similar to February.

Hedge Funds are short Treasuries across the board, with CFTC data showing a record short position in the 10 year Treasuries. This would appear to be a bet that the Fed will keep hiking rates well above the market’s forecast of 5%. That said, if rates kind of stall out here, we could see a short covering rally this summer. We will get a read on MBS spreads tonight when mortgage REIT AGNC Investment reports its earnings.

I spent some time on earnings reports in this week’s Weekly Tearsheet on Substack. Check it out and please consider subscribing.

Is commercial real estate the next shoe to drop in the banking sector? Some market watchers think the commercial real estate market is in for some rough sledding, especially the office market. The office market in particular is struggling as remote work is reducing demand for space. The vacancy rate for office reached 12.9%, which was worse than anytime during the Great Recession.

This is in some ways a replay of the 1970s, when people fled the cities to the suburbs and companies relocated operations. In other words, this is a secular change, not a cyclical one. Lower interest rates might not make all that much of a difference.

Filed under: Economy | 30 Comments »

Vital Statistics:

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

The economy is accelerating again, according to the Flash Composite PMI report from S&P Global. “The latest survey adds to signs that business activity has regained growth momentum after contracting over the seven months to January. The latest reading is indicative of GDP growing at an annualized rate of just over 2%. Growth is also reassuringly broad-based, led by services thanks to a post-pandemic shift in spending away from goods, though goods producers are also reporting signs of demand picking up again. Jobs growth has accelerated alongside the resurgence of demand, aided by reports of vacancies being more easily filled, reflecting improved supply of candidates and higher wages. However, the upturn in demand has also been accompanied by a rekindling of price pressures. Average prices charged for goods and services rose in April at the sharpest rate since September of last year, the rate of inflation having now accelerated for three successive months. This increase helps explain why core inflation has proven stubbornly elevated at 5.6% and points to a possible upturn – or at least some stickiness – in consumer price inflation.”

The national delinquency rate fell below 3% for the first time, according to the latest info from Black Knight. There is generally a seasonal aspect to this as DQs fall in March due to tax refunds. Foreclosure starts and rates increased however we are still well below pre-pandemic levels. I suspect that mortgage forbearance is still playing a part in distorting the numbers.

The Fed is re-thinking its decision to loosen the stress test requirements for banks with under $250 billion in assets. Under the relaxed rules, only the bigger banks were required to add unrealized gains / losses to their portfolio of available for sale securities. The Feds think this might have allowed Silicon Valley Bank to hide its problems. That said, Silicon Valley Bank wasn’t hedging the interest rate risk on its portfolio and that was the issue. The rule change might have tipped off regulators and the markets that something was wrong a bit earlier but the bank would still have failed.

Despite the decrease in median home prices in NAR’s Existing Home Sales report, asking prices are still up about 2.5% on a year-over-year basis. That said, any positive pricing momentum in the real estate market seems to be fading as affordability constraints remain an issue.

Active inventory continues to rise, with the number of homes for sale increasing 49% on a year-over-year basis.

Filed under: Economy | 18 Comments »

Vital Statistics:

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

Existing home sales fell 2.4% in March, according to the National Association of Realtors. Sales were down 22% on a year-over-year basis. “Home sales are trying to recover and are highly sensitive to changes in mortgage rates,” said NAR Chief Economist Lawrence Yun. “Yet, at the same time, multiple offers on starter homes are quite common, implying more supply is needed to fully satisfy demand. It’s a unique housing market.”

The median home price fell 0.9% on a YOY basis to $379,300. Days on market fell to 29 days.

The Conference Board’s Index of Leading Economic Indicators fell by 1.2% in March. “The U.S. LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The weaknesses among the index’s components were widespread in March and have been so over the past six months, which pushed the growth rate of the LEI deeper into negative territory. Only stock prices and manufacturers’ new orders for consumer goods and materials contributed positively over the last six months. The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”

The Fed’s Beige Book showed the economy deteriorated in recent weeks. Overall, we are seeing evidence that pricing pressures are abating and the labor market is softening.

“Overall economic activity was little changed in recent weeks. Nine Districts reported either no change or only a slight change in activity this period while three indicated modest growth. Expectations for future growth were mostly unchanged as well; however, two Districts saw outlooks deteriorate. Consumer spending was generally seen as flat to down slightly amid continued reports of moderate price growth…On balance, residential real estate sales and new construction activity softened modestly. Nonresidential construction was little changed while sales and leasing activity was generally flat to down. Lending volumes and loan demand generally declined across consumer and business loan types…Employment growth moderated somewhat this period as several Districts reported a slower pace of growth than in recent Beige Book reports. A small number of firms reported mass layoffs, and those were centered at a subset of the largest companies. Some other firms opted to allow for natural attrition to occur, and to hire only for critically important roles…Overall price levels rose moderately during this reporting period, though the rate of price increases appeared to be slowing. Contacts noted modest-to-sharp declines in the prices of nonlabor inputs and significantly lower freight costs in recent weeks. Nevertheless, producer prices for finished goods rose modestly this period, albeit at a slightly slower pace. Selling price pressures eased broadly in manufacturing and services sectors. Consumer prices generally increased due to still-elevated demand as well as higher inventory and labor costs. Prices for homes and rents leveled out in most Districts but remained at near record highs. Contacts expected further relief from input cost pressures but anticipated changing their prices more frequently compared to previous years.”

Homebuilder D.R. Horton reported a 33% decrease in earnings per share, however guidance cheered the Street, which sent the stock up 7%.

“The spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the first quarter. Despite higher mortgage rates and inflationary pressures, demand improved during the
quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions. Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable.”

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Vital Statistics:

Stocks are lower this morning on disappointing earnings. Bonds and MBS are up.

Mortgage applications fell 8.8% last week as purchases fell 8% and refis fell 10%. “Last week’s increase in mortgage rates prompted a pullback in application activity. With more first-time homebuyers in the market, we continue to see increased sensitivity to rate changes. The 30-year fixed rate increased 13 basis points to 6.43 percent, which led to purchase applications declining 10 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Affordability challenges persist and there is limited for-sale inventory in many markets across the country, so buyers remain selective on when they act. The 10-percent drop in FHA purchase applications, and the increase in the average purchase loan size to its highest level in a month, are other indications that first-time buyers have pulled back. The spread between the jumbo and conforming 30-year fixed rates widened slightly last week to 15 basis points, but this was a much tighter spread compared to the past year. As banks reduce their willingness to hold jumbo loans, we expect this narrowing trend to continue.”

Western Alliance reported first quarter earnings after the close and the stock rallied 16% on the open. Earnings per share came in at $1.28 which was below the Street estimate of $2.04 however adjusted earnings per share came in at $2.30.

The bank saw deposit outflows in the aftermath of the Silicon Valley Bank situation, and ended the quarter with $47.6 billion. In April, the Western Alliance picked up another $2 billion in deposits, which are 73% insured. Immediately available liquidity is 158% of uninsured deposits.

Western Alliance did make some security sales and wrote down some investments. Provisions for credit losses increased, primarily due to a corporate debt security issued by a financial company and increased economic uncertainty. Book value per share increased.

Atlanta Fed President Ralph Bostic said that the FOMC will probably hike another 25 basis points and then pause. “One more move should be enough for us to then take a step back and see how our policy is flowing through the economy, to understand the extent to which inflation is returning back to our target…If the data come in as I expect, we will be able to hold there for quite some time,” he said. “Once we get to that point, I don’t have us really doing anything but monitoring the economy for the rest of this year and into 2024.”

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Vital Statistics:



Stocks are higher as earnings come in. Bonds and MBS are down.



Stocks continue to rise despite rising rates. Despite the good CPI numbers, the Fed Funds futures are solidly predicting a 25 basis point hike in May.





Housing starts fell 0.8% MOM and 17% YOY to a seasonally adjusted annual rate of 1.42 million. Building permits fell 8.8% MOM and 24.8% YOY to 1.41 million. Single family starts rose while multi-family fell.

Multi-family completions came in at 484k. While housing starts overall have been tepid, multi-family completions has been hovering around 35 year highs. With additional apartment supply coming onto the market, we should see a better balance of housing supply and demand.





Bank of America reported first quarter earnings that came in above expectations. Deposits fell about 3%, and remained above $1 trillion. Mortgage origination fell 25% QOQ to $3.9 billion. This was down 76% from a year ago. Net interest income rose 25%. The stock is up about 2% pre-open.

Bank of America provisioned $931 billion for credit losses, but charge-offs remain below pre-pandemic levels.

Goldman reported disappointing earnings driven by lower trading revenue. The stock is down about 3% pre-open.



The Silicon Valley Bank situation might be more widely representative than people think, at least according to a new paper that analyzes the use of interest rate swaps at banks. The most interesting takeaway: Banks with the most fragile funding – i.e., those with highest uninsured leverage — sold or reduced their hedges during the monetary tightening. This allowed them to record accounting profits but exposed them to further rate increases. These actions are reminiscent of classic gambling for resurrection: if interest rates had decreased, equity would have reaped the profits, but if rates increased, then debtors and the FDIC would absorb the losses.

The regional banks will start reporting in the next few days, and it will be interesting to see if this is in fact true.



Economic bellwether Prologis reported better than expected earnings this morning. Prologis operates logistics facilities and its results say a lot about consumer demand and manufacturing. “Demand remains healthy, despite some moderating in terms of decision-making. Given the macroenvironment, we continue to operate our business with a degree of caution.”





Filed under: Economy | 26 Comments »

Vital Statistics:

Stocks are flat this morning as earnings come in. Bonds and MBS are down.

The upcoming week won’t have much in the way of market-moving data, but we will get a lot of housing data with housing starts and existing home sales. Bank earnings (particularly the regionals) will be a big focus. This morning we heard from M&T, which reported better than expected earnings and State Street which disappointed.

Homebuilder sentiment improved a touch in March, according to the NAHB / Wells Fargo Housing Market Index. “For the fourth straight month, builder confidence has increased due to a lack of resale inventory despite elevated interest rates,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Builders note that additional declines in mortgage rates, to below 6%, will price-in further demand for housing. Nonetheless, the industry continues to be plagued by building material issues, including lack of access to electrical transformer equipment.”

“Currently, one-third of housing inventory is new construction, compared to historical norms of a little more than 10%,” said NAHB Chief Economist Robert Dietz. “More buyers looking at new homes, along with the use of sales incentives, have supported new home sales since the start of 2023. And while AD&C loan conditions are tight, there is not significant evidence thus far that pressure on the regional bank system has made this lending environment for builders and land developers worse.”

Today’s homebuyers are exceptionally interest rate sensitive, and most won’t accept a rate higher than 5.5%. The problem is that the typical mortgage rate is about 6.4%. The high rate environment also affects home sellers, who might be inclined to upsize or downsize but find their current mortgage rate is too good to warrant moving.

“Our consulting team has witnessed this across the country, noting that home builders who choose to subsidize buyers’ mortgage rates, bringing the overall rate down below 5.5%, have been achieving the most success. Many of the largest builders in the country have been buying mortgage rates down below 5.0%,” said CEO John Burns and Maegan Sherlock, a senior research analyst, in the report.

Unfortunately, rates need to fall quite a bit lower to start bringing back activity into the mortgage market. “Even if the Fed chooses not to hike interest rates next month, which would likely bring down mortgage rates, the limited supply of homes for sale would remain a major obstacle for would-be buyers,” wrote Daryl Fairweather, chief economist at Redfin, in the report. “Rates dipping below 6% would probably pique the interest of more buyers, but enough homeowners have rates in the 3% or 4% range that we’re unlikely to see a big uptick in new listings.”

Median asking rents fell 0.4% in March to $1,937. A year ago, median asking rent was $1,944. This is after spiking during the COVID-19 pandemic, so it is in some ways just a return of some of the excess froth in the market. Multi-family construction is up, and a lot of units are slated to enter the market. As we have been seeing in the housing starts data, single family is in the doldrums while developers have been building a lot of multi units.

“Rents are falling, but it feels more like they’re just returning to normal, which is healthy to some degree,” said Dan Close, a Redfin real estate agent in Chicago, where the median asking rent in March was 9.2% lower than it was a year earlier. “It’s similar to the cost of eggs. You can say egg prices are plummeting, but what’s really happening is they’re finally making their way back to the $3 norm instead of $5 or $6. Rents ballooned during the pandemic, and are now returning to earth.”

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Vital Statistics:

Stocks are lower this morning after the retail sales number came in lower than expectations. Bonds and MBS are down.

Retail sales fell 1% MOM in March, according to the Census Bureau. On a year-over-year basis, sales were up 2.9%. Note that these numbers are not adjusted for inflation, so sales fell YOY on an inflation-adjusted basis. January and February sales numbers were revised downward. If you strip out vehicles and gasoline, retail sales fell 0.3% MOM.

JP Morgan reported first quarter earnings this morning. Book value rose 9%, while average deposits fell 8%. In home lending, JPM originated $5.7 billion compared to $6.7 billion in Q4 and $24.7 billion a year ago. CEO Jamie Dimon summarized the current situation as follows:

The U.S. economy continues to be on generally healthy footings —consumers are still spending and have strong balance sheets, and businesses are in good shape. However, the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks. The banking situation is distinct from 2008 as it has involved far fewer financial players and fewer issues that need to be resolved, but financial conditions will likely tighten as lenders become more conservative, and we do not know if this will slow consumer spending. We also continue to monitor for potentially higher inflation for longer (and thus higher interest rates), the inflationary impact of continued fiscal stimulus, the unprecedented quantitative tightening, and geopolitical tensions including relations with China and the unpredictable war in Ukraine

Provisions for loan losses grew. The stock is up about 6% pre-open. Separately, Wells and Citi also reported stronger-than-expected earnings.

Industrial Production rose 0.5% in March, while manufacturing production fell 0.5%. Capacity utilization rose to 79.8%. Meanwhile, import and export prices both fell.

Chicago Fed President Austan Goolsbee spoke on CNBC this morning and made some dovish comments. “There is no way you can look at current conditions around the U.S. and not think that some mild recession is on the table as a possibility,” Goolsbee said, in an interview on CNBC.   “What I am looking at quite clearly coming into the next FOMC meeting is what’s happening on credit…how much of a credit crunch is there,” he said. “Let’s be mindful that we’ve raised a lot. It takes time for that to work its way through the system,” Goolsbee said. “If you add financial stress on top of that, let’s not be too aggressive.

Consumer sentiment rose in April, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment was essentially unchanged this month, inching up less than two index points from March. Sentiment is now about 3% below a year ago but 27% above the all-time low from last June. Rising sentiment for lower-income consumers was offset by declines among those with higher incomes. While consumers have noted the easing of inflation among durable goods and cars, they still expect high inflation to persist, at least in the short run. On net, consumers did not perceive material changes in the economic environment in April.”

Year ahead inflationary expectations rose from 3.6% to 4.6%, which is not good if you want the Fed to slow down. That said the UM survey’s inflations expectations tend to be volatile. Longer-run expectations were flat at 2.9%.

Filed under: Economy | 6 Comments »

Vital Statistics:

Stocks are higher this morning after another benign inflation report. Bonds and MBS are up.

The producer price index, which measures inflation at the wholesale level, fell 0.5% in March. The decline was driven by a 5.1% decrease in energy prices. The core rate, which strips out food, energy and trade services rose 0.1%. The Street was looking for a flat number, so the decline was a positive surprise.

Initial jobless claims inched higher, rising to 239k. Claims are moving higher, although we are still at extremely low levels if you look at historical numbers

The FOMC minutes were released yesterday. The Silicon Valley Bank situation was still new, but the committee was still focused primarily on inflation:

Participants agreed that the U.S. banking system remained sound and resilient. They commented that recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. Participants agreed that the extent of these effects was uncertain. Against this Federal Open Market Committee background, participants continued to be highly attentive to inflation risks…

Many participants remarked that the incoming data before the onset of the banking sector stresses had led them to see the appropriate path for the federal funds rate as somewhat higher than their assessment at the time of the December meeting. After incorporating the banking-sector developments, participants indicated that their policy rate projections were now about unchanged from December…

With inflation still well above the Committee’s longer run goal of 2 percent, participants agreed that inflation was unacceptably high. Participants commented that recent inflation data indicated slower-than-expected progress on disinflation. In particular, they noted that revisions to the price data had indicated less disinflation at the end of last year than had been previously reported and that inflation was still quite elevated.

Bonds rallies slightly on the FOMC minutes, but nothing dramatic.

United Wholesale is offering 1% down loans. If the borrower brings 1% down, UWM will fill in the other 2%, up to $4,000. “We are bringing back the Conventional 1% Down to give independent mortgage brokers a competitive edge with borrowers and real estate agents, while also helping make homeownership more affordable and accessible for borrowers across the country,” said Mat Ishbia, president and CEO of UWM. “We’re going to continue developing products and solutions that will help get more borrowers into homes faster, easier and cheaper and Conventional 1% Down is a great example of how we’re doing that.”

The program is limited to people who are at or below 50% of the area median income. I suspect affordability constraints are going to make it difficult for borrowers under 50% of AMI to qualify.

Filed under: Economy | 21 Comments »

Vital Statistics:

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

Prices at the consumer level rose 0.1% MOM and 5.0% YOY. Shelter was the big driver, as food and energy prices both fell. If you strip out food and energy, the core rate rose 0.4% MOM and 5.6% YOY. It looks like the spike we saw in January and February is over.

Chicago Fed president Austan Goolsbee made dovish comments yesterday, urging the Fed to use caution on further rate hikes. His point is that the banking crisis will restrict credit which will act as further tightening. The Fed meeting is May 2-3, so we will get one more PCE reading before the meeting. But other data points – ISM, NFIB, etc are showing price pressures are declining.

The Fed Funds futures have trimmed their expectations for the May meeting slightly, but are still tilted towards a final 25 basis point hike in the Fed Funds rate.

Mortgage applications increased 5.3% last week as purchases rose 8% and refis rose 0.1%. Refis are down 57% from a year ago. “Incoming data last week showed that the job market is beginning to slow, which led to the 30-year fixed rate decreasing to 6.30 percent – the lowest level in two months,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Prospective homebuyers this year have been quite sensitive to any drop in mortgage rates, and that played out last week with purchase applications increasing by 8 percent. Refinance application volume was a mixed bag with total volume essentially flat, conventional volume down for the week, but VA refinance volume increasing. The level of refinance activity remains almost 60 percent below last year, as most homeowners are currently locked in at much lower rates.”

Mortgage Credit Availability increased in March, according to the MBA. “Mortgage credit supply increased modestly in March but remained close to its tightest levels since 2013. With the spring buying season underway, lenders are grappling with the threat of a recession and tighter overall financial conditions following the recent bank failures,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The supply of government mortgage credit – which includes FHA and VA loans that many first-time homebuyers rely on – declined for the third time in four months, which could potentially hinder first-time buyer activity. There was a small increase in credit availability for jumbo loans, with more programs offered for cash-out refinances. However, we expect banks, which account for most of the jumbo market, will tighten jumbo credit criteria in response to recent challenges in the banking sector.”

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