All Things in Moderation

Vital Statistics:

Stocks are lower this morning after inflation came in hotter than expected. Bonds and MBS are down.

Inflation rose 0.3% MOM and 8.3% YOY, according to BLS. This is a deceleration from the 1.2% MOM increase we saw in March. The core inflation rate (ex-food and energy) rose 0.6% MOM which was double March’s rate of increase. Since the Fed focuses more on core numbers, this stat is getting the market’s attention. The core rate rose 6.2% YOY.

Energy prices fell, although much of that was due to seasonal adjustments. We are heading into the summer driving season, where demand will spike.

Shelter rose 5.1% YOY, however this number is going up given how fast home price appreciation has been. It generally gets reflected with an 18 month lag, so the torrid price appreciation over the last two years will begin adding upward pressure to the index going forward.

Overall, this report changes nothing with respect to the Fed. It will probably hike another 50 basis points at the June meeting. Stocks and bonds were up prior to the report, so the market is taking it negatively.

Mortgage Applications rose by 2% last week as purchases increased 5% and refis fell 2%. “The increase in mortgage applications last week was driven by a strong gain in application activity for conventional and government purchase loans, even as mortgage rates rose to their highest level – 5.53 percent – since 2009,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite a slow start to this year’s spring home buying season, prospective buyers are showing some resiliency to higher rates. Purchase activity has now increased for two straight weeks.

Mortgage credit tightened in April, according to the MBA. Its Mortgage Credit Availability Index fell by 3.2%. The decrease was driven by government loans, specifically streamline refis. “Lenders reacted to the jump in mortgage rates over the past two months,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “With the rate/term refinance business drying up, lenders have reduced the availability of government streamline refinancing programs, which are no longer as relevant an option for many borrowers.” Mortgage credit overall is about as tight as it was in the aftermath of the financial crisis. Note how much lower it is compared to the bubble years. This is one of the many reasons why the acceleration in home prices doesn’t portend the sort of bust we had in 2006.

Rocket reported that first quarter volumes fell 48% YOY to $54 billion while gain on sale margin contracted to 3.01% from 3.74%. The company is guiding for Q2 volumes to come in between $35 billion and $40 billion and for gain on sale margins to fall to 2.6% – 2.9%. Rocket said that bond market volatility contributed positively to its first quarter gain on sale, so this guidance is probably a reversal of that.

“Rocket delivered a solid performance in the first quarter and achieved our best Q1 volume in purchase and cash out refinances, even as rates rose rapidly. Now, as we move further into the year, we will successfully navigate the mortgage and real estate headwinds by protecting our margin and profitability while continuing to invest in strategic areas such as technology, partnerships and performance marketing to grow share and expand our business for the long term,” said Jay Farner, Vice Chairman and CEO of Rocket Companies.

Rocket’s comments about protecting margin and profitability are probably welcome news for independent mortgage bankers who are worried about a replay of the UWM / Rocket price war of 2018. Rocket’s stock is down 10% this morning.

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Vital Statistics:

Stocks are rebounding this morning after yesterday’s bloodbath. Bonds and MBS are up.

The 10 year yield touched 3.2% yesterday and has been falling pretty dramatically ever since. Not sure what is driving it, but it is a welcome respite from march higher in rates. One thing to keep in mind is that as rates rise, more foreign money will be attracted to Treasuries. The US dollar has been moving steadily higher, which is good news for inflation as it make imports less expensive. We have a lot of Fed-speak today, and bonds are bracing for the consumer price index report tomorrow.

Small Business Optimism remained flat at 93.2 according to the National Federation of Independent Businesses.

While inflation remains uppermost in the minds at the Federal
Reserve, the “R” word (recession) has increasingly appeared in the
prognostications of economists. Predictions have a recession starting
as early as the third quarter of this year, although most guesses have
2023 for the start. The Fed announced a rate hike of half a point this
month with more hikes to come in future meetings. Interesting side
note, in the “old days” the Fed would raise rates between meeting if
thought necessary, not something they’re likely to do this go around
though. Under Paul Volcker, the Fed’s rate hit 20 percent, a long way
from where we are today. If, historically, the Fed’s rate needs to be
above inflation to be effective, we have a long way to go and the

Fed is way behind the curve.

The point about the Fed Funds rate and inflation is important. Economists distinguish between two interest rates: nominal and real. Nominal rates are what you read on the screen or see posted on CNBC. Real interest rates take into account inflation, since inflation works counter to interest rates. In other words, interest rates make your future money bigger, while inflation makes your future money smaller.

With inflation running at 6% or so, and the Fed Funds rate below 1%, real interest rates are still highly negative – in fact they are more negative than they were a year ago, even with the recent rate hikes. The prospect of the Fed’s necessary rate hikes has small businesses highly pessimistic about the second half of 2022.

United Wholesale reported first quarter earnings, with volume falling 21% YOY to $38.8 billion. Gain on sale margins improved to 0.99% from 0.8% in the fourth quarter of 2021. Guidance for Q2 is for volumes to contract to $26 – $33 billion and for gain on sale margins to fall to a range of 75 to 90 basis points. The company also announced a $300 million stock buyback and maintained its $0.10 dividend. The stock is up about 12% this morning.

Loan Depot also announced earnings this morning, which disappointed the street. Volumes fell 48% YOY to $21.6 billion, and gain on sale margin fell to 1.96% compared to 2.23% in the fourth quarter of 2021. Loan Depot is guiding for Q2 volume to fall to between $13 and $18 billion and for gain on sale margins to come in between 160 and 210 basis points. The stock is down about 22% this morning.

Rocket will announce its numbers after the close.

Filed under: Economy | 32 Comments »

Vital Statistics:

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

The upcoming week is pretty data-light, as is typical after the jobs report. We will get inflation data with the CPI and PPI on Wednesday and Thursday. We will get a lot of Fed-speak however.

Neel Kashkari said that inflation will come down, but there might be some pain. “I’m confident we are going to get inflation back down to our 2% target,” he told CNBC’s “Squawk Box” in a live interview. “But I am not yet confident on how much of that burden we’re going to have to carry vs. getting help from the supply side. It’s the lowest-income Americans who are most punished by these climbing prices, and yet your policy tools to tamp down inflation most directly affect those lowest-income Americans as well, either by raising the cost to get a mortgage … or if we have to do so much that the economy were to go into recession,” he said. “It’s their jobs that are most likely put at risk.”

Separately, used car prices (which are a surprisingly big component of inflation) are down 6.4% from their January peak. “We clearly have returned to vehicles depreciating again. That’s a good news story for both inflation and for consumers looking to buy a vehicle,” Jonathan Smoke, chief economist at Cox Automotive told CNBC.

Ralph Bostick said the Fed can hike rates 50 basis points at the next two to three meetings and then re-assess. The half point increase approved by the Fed last week “is already a pretty aggressive move. I don’t think we need to be moving even more aggressively. I think we can stay at this pace and this cadence and really see how the markets evolve … We are going to move a couple times, maybe two, maybe three times, see how the economy responds, see if inflation continues to move closer to our 2% target, then we can take a pause and see how things are going.”

Filed under: Economy | 9 Comments »

Vital Statistics:

Stocks are lower as markets continue their post-Fed sell-off. Bonds and MBS are down.

The economy added 428,000 jobs in April, which was a touch above the 400,000 consensus estimate. The gains were widespread, with leisure / hospitality adding 78,000 and manufacturing adding 55,000. Despite the recent gains in payrolls, we are still about 1.2 million jobs below pre-pandemic levels.

The unemployment rate was flat at 3.6%. Average hourly earnings increased 5.5% year-over-year. The labor force participation rate declined to 62.2% and the employment-population ratio declined to 60%.

Overall, this is a strong jobs report and it gives the Fed leeway to keep increasing interest rates. Historically, a 3.6% unemployment rate is exceptionally low, so they could let it increase modestly and still be within the boundaries of “full employment.”

Delinquencies declined to 4.11% in the first quarter, according to the MBA. This was down from 4.65% in the fourth quarter of 2021 and 6.38% a year ago. FHA delinquencies fell substantially. Most of the decrease was in the 90+ day bucket where the loans were either cured or entered post-forbearance workout plans.

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Vital Statistics:

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

The Fed raised interest rates 50 basis point yesterday and laid out the parameters of balance sheet reduction. Starting June 1, the Fed will start letting $17.5 billion in mortgage backed securities and $30 billion in Treasuries mature per month. Any maturing bonds in excess of those amounts will be re-invested back in the market. After 3 months, those ceilings will double to $35 billion in MBS and $60 billion in Treasuries.

The last time the Fed tried to shrink its balance sheet, it caused havoc in the repo market. This was because hedge funds were borrowing heavily in the repo market to fund basis trades (similar to what Long Term Capital Management was doing back in the day). They were exploiting minute mispricings in the Treasury market and leveraging heavily to make it worth their while. All of this blew up when repo rates (which was their cost of borrowing) spiked which threatened the stability of the financial system. The Fed ended up extending emergency loans and ended its experiment in balance sheet reduction. So, just be aware that letting some of these things just run off isn’t necessarily as easy as it sounds.

During the press conference, Jerome Powell said that a 75 basis point hike was not being “actively considered.” The bond market rallied a bit on the news, with the 10 year Treasury yield dropping to about 2.9%. This morning we are back at yesterday’s pre-meeting levels. TBA spreads have been extraordinarily wide for the past couple of weeks, with some coupons experiencing a half point bid / ask spread. It looks like bid / ask spreads are narrower this morning (but still wide compared to historical norms). The MBS market still seems somewhat jumpy despite the guidance the Fed put out yesterday.

Powell’s dismissal of a 75 basis point hike caused the June Fed Funds futures to become markedly more dovish. A week ago, the market consensus was that the Fed Funds rate would be in a 150-175 basis point range. Now, it is looking like the market is handicapping only a 25 basis point increase.

Black Knight is being bought by the Intercontinental Exchange, which owns Optimal Blue, MERS and Ellie Mae. “Since our founding in 2000, ICE’s simple mission has been to make analog and opaque financial transactions more digital and transparent, beginning with commodity markets, extending across a large array of asset classes, and most recently working to help streamline the mortgage industry,” said Jeffrey C. Sprecher, Founder, Chair and CEO of Intercontinental Exchange. “Black Knight shares our passion for leveraging technology to serve customers and households, and, with our expertise in operating networks and marketplaces, our planned acquisition will bring to life a true end-to-end solution for the mortgage manufacturing and servicing ecosystem, benefitting aspiring and current homeowners across the United States.”

I suspect that the Hart Scott Rodino antitrust review will not be a slam dunk, since it would combine loan origination systems Encompass and Empower. I think the LOS market is pretty concentrated and these two are on the bigger side when it comes to market share.

Since ICE also owns the New York Stock Exchange as well as other derivatives exchanges I could see them developing Resitrader into a whole loan trading ecosystem.

Initial Jobless claims rose to 200,000 last week, which was a touch above expectations. That said, 200,000 is extremely low in terms of historical standards. Separately outplacement firm Challenger, Gray and Christmas said that there announced job cuts rose to 24,286 last month.

Productivity collapsed in the first quarter of 2022. Nonfarm productivity fell 7.5%, which was the biggest drop since 1947. Unit labor costs increased a whopping 11.6%. This was driven by a 3.2% increase in compensation and and the decrease in productivity. Since productivity is ultimately the biggest driver of standards of living, this is worrisome. Keep in mind that this is only the first reading for the quarter so it will be revised.

Over the past four quarter, unit labor costs have increased 7.2%, which is the largest increase since 1982. I am not sure whether this troubles the Fed or not. Labor has lagged capital for so long that they might be ok with this. Of course it does indicate that the wage-price spiral is back after a long slumber.

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Vital Statistics:

Stocks are higher this morning as we await the FOMC decision. Bonds and MBS are flat.

The FOMC decision is due at 2:00 pm, so be careful locking around then. TBA bid / ask spreads are a little narrower today, but the market is skittish about the Fed’s plans for its holdings of mortgage backed securities.

The economy added 247,000 jobs in April, according to the ADP Employment Report. Small businesses lost 120,000 jobs while large businesses gained 321,000 jobs. ADP attributed the skew to the inability of small businesses to compete with big business for workers. Leisure and hospitality added the most employees, but education / health and professional / business services increased as well.

The Street is looking for 400,000 new jobs in Friday’s jobs report, so this was a bit of a miss. This report was the lowest reading over the past year. The report says this is due to the tight labor market and the shortage of workers overall. The demand is there, but the supply is not.

Mortgage Applications increased 2.5% last week as purchases rose 4% and refinances rose 0.2%. “Treasury yields eased slightly last week but remained close to 2018 highs, as financial markets await the news from the Federal Reserve on its latest plans for rate hikes and reducing its balance sheet holdings,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications increased for conventional, FHA, and VA loans and were up 4 percent overall,” he said. “This is potentially a good sign for the spring home buying season, which has seen a slow start thus far. The purchase market remains challenged by low levels of housing inventory and rapid home-price gains, as well as the affordability hit from higher mortgage rates that are forcing prospective buyers to factor in higher monthly payments.”

New Rez reported better-than-expected earnings for the first quarter, driven by a markup of its servicing portfolio. Book value per share rose 10%, which was a bright spot compared to some of the mortgage REITs like Annaly and AGNC Investment, which saw mid-teen % declines in book value per share.

The services economy expanded in April, but is decelerating according to the ISM Services Index. “The Prices Index reached an all-time high of 84.6 percent, up 0.8 percentage point from the March figure of 83.8 percent and surpassing the previous record of 83.9 percent in December 2021. Services businesses are continuing to replenish inventories, as the Inventories Index expanded for a third straight month; the reading of 52.3 percent is up 0.6 percentage point from March’s figure of 51.7 percent. The Inventory Sentiment Index (46.7 percent, up 6.5 percentage points from March’s reading of 40.2 percent) contracted in April for the second consecutive month, indicating that inventories are in ‘too low’ territory and insufficient for current business requirements.”

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Vital Statistics:

Stocks are marginally higher as we begin the two-day FOMC meeting. Bonds and MBS are up.

Job openings hit a series high, according to the JOLTs report. The quits rate rose to 3%. Quits are important because they are a good predicter of future wage growth. Quits jumped in construction, reflecting the dire shortage of workers in this area. Overall, this report gives the Fed the comfort to raise rates, which is what they are going to do tomorrow.

Home prices rose 22% YOY in April, according to the Clear Capital Home Data Index. On a quarterly basis, home prices rose 6%, which means that we are seeing an acceleration in home price appreciation. Some of the usual suspects like San Jose saw a 10.7% increase. The South and the West Coast were the leaders, however even the Midwest and Northeast saw improving conditions.

Rising home prices and mortgage rates have taken a bite out of affordability. The percentage of median income that a mortgage payment taken out on the median home has jumped to about 26% from 20% late in 2020. While this is a huge leap compared to recent history, it is about average going back to the early 1980s. In fact, during the 81-82 recession, when mortgage rates were in the high teens, the P&I payment accounted for 50% of the median income.

Separately, CoreLogic reported that home prices rose 21% in March, although it forecasts that home price appreciation will slow to 6% over the next year. “The annual growth in the U.S. index was the largest we have measured in the 45-year history of the CoreLogic Home Price Index,” said Dr. Frank Nothaft, chief economist at CoreLogic. “Couple that price increase with the rapid rise in mortgage rates and buyer affordability has fallen sharply. In April, 30-year fixed mortgage rates averaged nearly 2 percentage points higher than one year earlier. With the growth in home prices, that means the monthly principal and interest payment to buy the median-priced home was up about 50% in April compared with last April.”

Redfin noted the same thing, saying that the typical borrower’s monthly payment has increased 39% YOY. “Rising mortgage rates are taking a bite out of pending sales as both buyers and sellers take a step back from the turbulent market,” said Redfin Chief Economist Daryl Fairweather. “It seems as though the ratio of buyers to sellers remains mostly the same, which is why we have yet to see a substantial drop in bidding wars or the share of homes selling quickly. It’s still early days though when it comes to 5% mortgage rates. The number of buyers willing to pay such high mortgage payments could evaporate by late summer.”

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Vital Statistics:

Stocks are flat this morning as we head into a big week of data. Bonds and MBS are down.

The FOMC is meeting this week, and the market is looking for a 50 basis point increase in the Fed Funds rate. There won’t be any new projections, although balance sheet reduction is one of the big issues going forward.

In terms of economic data, we will get ISM numbers this week, along with the jobs report on Friday. We are also in the heart of earnings season, with a couple thousand earnings reports coming.

The Street is looking for 400,000 jobs to have been created in April, a 3.6% unemployment rate, and 5.5% wage growth.

Institutional investors in the rental space are getting static from government and consumer groups. The complaint is that first time homebuyers are getting priced out of the market by investors. Is that true? Investors bought something like 80,300 houses in the fourth quarter, which is a drop in the bucket compared to the 6.5 million existing and new home sales we generally get in a year. It doesn’t seem like that sort of incremental buying is moving up house prices.

The usual suspects are writing letters asking the institutions to explain why they are raising rents, and have been accused of “running a scam.” They are going after Invitation Homes, American Homes 4 Rent and Progress Residential. Rents are rising because home prices are rising. Shortages of workers and materials are delaying homebuilding, along with regulation which adds to the price of a new home.

Manufacturing decelerated in April, according to the ISM Manufacturing Index. Sentiment is still strong, but shortages remain an issue. Of note is the idea that inflation may be moderating:

“The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment. In April, progress slowed in solving labor shortage problems at all tiers of the supply chain. Panelists reported higher rates of quits compared to previous months, with fewer panelists reporting improvement in meeting head-count targets. April saw a slight easing of prices expansion, but instability in global energy markets continues. Surcharge increase activity across all industry sectors continues. Panel sentiment remained strongly optimistic regarding demand, though the three positive growth comments for every cautious comment was down from March’s ratio of 6-to-1, Panelists continue to note supply chain and pricing issues as their biggest concerns.”

You can see that the ISM is still pretty strong over the longer-term, however it is heading down as inflation and bottlenecks remain an issue:

Construction spending rose 0.1% MOM and 11.7% YOY, according to Census. This was a touch below expectations. Residential construction rose 1% MOM and 18% YOY.

Filed under: Economy | 22 Comments »

Vital Statistics:

Stocks are lower this morning after disappointing earnings from tech leaders Amazon and Apple. Bonds and MBS are down.

Personal income rose 0.5% in March, according to the Bureau of Economic Analysis. February was revised upward from 0.5% to 0.7% as well. The Personal Consumption Expenditures Index (the Fed’s preferred measure of inflation) rose 0.9% in March, which was a big acceleration from February which rose 0.5%. This was driven primarily by increases in food and energy which increased due to the situation in Ukraine.

The core PCE price index rose 0.3% which was flat with February’s numbers. On an annual basis, the PCE price index rose 6.6%. Ex-food and energy it rose 5.2%. Personal Consumption Expenditures rose 1.1% and the savings rate fell.

Overall this report shows that incomes are expanding, which is good for the economy, however the increase in inflation will keep the Fed in a defensive role. This report also seems to contradict the first quarter’s initial read on GDP, which seems out of step with most of the other data out there. I suspect GDP will be revised upward in future releases.

Employment costs rose 1.4% in the first quarter as wages rose 1.2% and benefits increased 1.8%. On a year-over-year basis 4.5% as wages rose 4.7% and benefits increased 4.1%.

Annaly Capital (one of the biggest mortgage REITs out there) reported first quarter earnings. Book value per share fell a whopping 15% as MBS spreads widened, which was offset by increases in the value of the servicing book.

“The market environment during the first quarter of 2022 was one of the most challenging for fixed-income in decades, characterized by exceptional volatility with substantial spread widening and a notable increase in benchmark rates,” remarked David Finkelstein, Annaly’s Chief Executive Officer and President. “While our portfolio continued to generate strong earnings, our book value was not immune to the effects of Agency MBS underperformance resulting from market turbulence.”

Investors like Annaly are the ultimate buyers of the mortgage banking production. They are wary about the Fed’s impending balance sheet reduction and are therefore unlikely to aggressively bid mortgage backed securities. This flows through to TBA prices and finally through to the rates mortgage bankers can offer borrowers.

Mortgage backed securities are driven primarily by two factors: the level of overall interest rates in the market, and the volatility of interest rates in the market. Volatility is a key driver, since mortgage backed securities exhibit what bond geeks call negative convexity. This is because of prepayment risk. The takeaway should be that if Treasuries settle down and find a level, then we should see an improvement in MBS spreads, which will help push down borrowing rates.

Consumer sentiment improved in April, according to the University of Michigan Consumer Sentiment Survey. While sentiment is better than it was in March, we are still well below levels from a year ago. Even if you look at a longer-term chart, you can see that the mood of consumers is quite dour.

The downward slide in confidence represents the impact of uncertainty, which began with the pandemic and was reinforced by cross-currents, including the negative impact of inflation and higher interest rates, and the positive impact of a persistently strong labor market and rising wages. The global economy has added even more uncertainties about prospects for the U.S. economy, including the growing involvement in the military support for Ukraine, and renewed supply line disruptions from the covid crisis in China. Who would not be apprehensive about future conditions, even if on balance they anticipated a continued expansion? 

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Vital Statistics:

Stocks are higher this morning despite an awful GDP print. Bonds and MBS are flat.

GDP fell 1.4% in the first quarter, according to the Bureau of Economic Analysis. This was well below the Street consensus, which predicted a gain of 1.1%. Personal Consumption Expenditures rose 2.5%, which again was below the Street consensus of a 3.4% increase.

Decreased private inventory investment and declining government spending (i.e. the expiration of COVID-related stimulus and assistance programs) subtracted from growth, while increases in consumption and construction helped increase GDP. Imports rose, which again is a negative factor.

The decline in inventory investment was driven primarily by autos, which can be volatile although a chip shortage is impacting low inventory levels. The increase in personal spending was driven by healthcare and was offset by decreased spending on goods.

Overall, this report seems out of step with what the Atlanta Fed’s GDP Now index was predicting. I suspect the muted reaction in the markets (interest rates didn’t move) is driven by expectations that the number will be revised upward in coming reports.

That said, even if GDP gets revised positively, the combination of stagnating growth and high inflation puts the Fed in a pickle. If unemployment starts ticking upward, it might be time to dust off the misery index.

Separately, initial jobless claims fell to 180,000 last week. These are still incredibly low numbers, which indicates the weakness we are seeing in the GDP numbers aren’t filtering through to the labor market.

Profits on the median-priced single family home declined in the first quarter of 2022 from 51.6% to 47.2%, according to data from ATTOM. This is still much higher than historical averages, however it might indicate that the housing market is beginning to cool off.

“Home prices simply can’t continue to go up as rapidly as they have for the past few years,” said Rick Sharga, executive vice president of market intelligence for ATTOM. “The combination of higher prices, rising mortgage rates and the highest rates of inflation in 40 years may be pricing some prospective buyers out of the market, which means we may begin to see lower sales numbers. Ultimately, as affordability worsens, price appreciation should slow down, and we may even see modest price corrections in some markets.”

The report said that the typical home seller had owned the property for only 5.7 years which was down from 6.8 years a year ago.

The first time homebuyer is being sidelined by rising mortgage rates. The 200 basis point increase in mortgage rates makes a big impact on affordability. At the end of 2021, the median home price was $346,900 and the average mortgage rate was about 3%. For a typical mortgage with 20% down, the principal and interest payment works out to be about $1,170. At 5%, that payment jumps to $1,490. Big increase.

“Prospective homebuyers have pulled back this spring, as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices. The recent decrease in purchase applications is an indication of potential weakness in home sales in the coming months,” said MBA associate vice president Joel Kan in a Wednesday statement. 

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