Morning Report: Bonds and the Trump Trade

Posted on October 23, 2024 by Brent Nyitray

Vital Statistics:

Stocks are lower this morning as earnings continue to pour in. Bonds and MBS are down again.

Bond yields seem to be rising in lockstep with the probability of a Trump win. Although polling data indicates a close race, betting markets are increasingly predicting a Trump win. Both sides accuse the other of “painting the tape” with Democrats accusing foreign bad actors of placing big bets to influence the odds, while Republicans accuse Democrats of releasing partisan, over-D sampled polls into the overall mix.

Presumably, a Trump win would be bad for bonds as tariffs would raise prices, and a more pro-business regulatory regime would be better for the economy overall, which will keep the Fed from cutting rates as aggressively. A Trump Presidency would also bring back the debate over what to do with the GSEs.

Mortgage applications fell 6.7% last week as purchases fell 5.1% and refis fell 8.4%. “Mortgage rates saw mixed results last week, but the 30-year fixed rate remained unchanged at 6.52 percent. Application activity decreased to its lowest level since July, as both purchase and refinance applications saw declines,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications continued to run stronger than last year’s pace for the fifth consecutive week. Even though rates have been on a recent upswing, they are over a full percentage point lower than a year ago, which has kept some homebuyers in the market. For-sale inventory has started to loosen, and home-price growth has eased in some markets, providing more options for buyers in combination with these lower rates.”

Home prices grew 0.5 MOM in September, according to data from Redfin. On a year-over-year basis, prices rose 6%. “There are around 20% fewer homes on the market today than there were five years ago, mainly because so many homeowners locked in a low mortgage rate during the pandemic,” said Redfin Senior Economist Sheharyar Bokhari. “With mortgage rates back above 6.5% this month—and unlikely to drop below 6% this year—home prices will likely continue their consistent climb until more inventory comes onto the market in the spring.”  

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Morning Report: Morning Report: Fed officials open to slowing the pace of rate reductions

Posted on October 16, 2024 by Brent Nyitray

Vital Statistics:

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

San Francisco Fed Chair Mary Daly is open to skipping a rate cut at one of the two remaining Fed meetings this year. “It’s clear that the direction of change is down,” but added “one or two cuts was a reasonable thing” provided that the economic data continues as expected. Atlanta Fed Head Raphael Bostic is also open to skipping a meeting.

The December Fed Funds futures still overwhelmingly see two more cuts this year:

Mortgage credit availability decreased in September, according to the MBA. “Mortgage credit availability tightened slightly in September as lenders remained cautious in this uncertain economic environment,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “There was a decline in loan programs for cash-out refinances, jumbo and non-QM loans, including loans that require less than full documentation. Most component indexes decreased over the month, but the government index increased, driven by more offerings of VA streamline refinances.”   

Mortgage applications fell 17% last week as purchases fell 7.2% and refis fell 17%. “ Mortgage rates moved higher for the third consecutive week, with the 30-year fixed rate increasing to 6.52 percent, its highest level since August,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The recent uptick in rates has put a damper on applications. Refinance applications fell 26 percent to their lowest level since August, with comparable drops in both conventional and government refinances. This pushed the refinance share of applications back below 50 percent for the first time in over a month. Furthermore, purchase applications also decreased but notably remain 7 percent higher than a year ago.”

US Bank reported better than expected earnings, although revenues missed. Mortgage origination volume improved markedly, rising 16.7% YOY to $11 billion. They are marking their $215 billion MSR portfolio at 4.9x. Provisions for credit losses increased 8% YOY.

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Morning Report: Strong jobs report

Posted on October 4, 2024 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning after a strong jobs report. Bonds and MBS are getting slammed.

The port strike has been suspended as the ports and Longshoreman’s union extended their contract through to Jan 15. The issue was almost certainly unhelpful to the Democrats for the upcoming election, so the fight has been tabled until it is over.

The economy added 254,000 jobs in September, according to the Employment Situation Report. This was well above the Street expectations of 132,000. The unemployment rate ticked down to 4.1%. The employment-population ratio ticked up, while the labor force participation rate was flat.

Average hourly earnings rose 4%, which was well above the 3.7% expectation. Overall, it was a strong report.

The early reaction in the bond market was negative, as it gives the Fed more leeway to move cautiously with rate cuts. The 10 year spiked to 3.99% before falling back.

The Fed Funds futures currently see 25 basis points in November and another in December.

The services economy expanded in September, according to the ISM Services Report. “The increase in the Services PMI® in September was driven by boosts of more than 6 percentage points for both the Business Activity and New Orders indexes. The Employment and Supplier Deliveries indexes had mixed results, with a 2.1-percent decrease and 2.5-percent increase, respectively. The Supplier Deliveries Index returned to expansion in September, indicating slower delivery performance. The stronger growth indicated by the index data was generally supported by panelists’ comments; however, concerns over political uncertainty are more prevalent than last month. Pricing of supplies remains an issue with supply chains continuing to stabilize; one respondent voiced concern over potential port labor issues. The interest-rate cut was welcomed; however, labor costs and availability continue to be a concern across most industries.”

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Morning Report: Consumer confidence falls on weakening labor outlook

Posted on September 25, 2024 by Brent Nyitray

Vital Statistics:

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

Home prices hit a new record, according to the Case-Shiller Home Price Index. Prices rose 5.0% year-over-year in July, a deceleration from the 5.5% recorded in June. New York City led the charge, followed by Las Vegas and Los Angeles. “We continue to observe outperformance in most low-price tiers in the market on a three- and five-year horizon,” Luke continued. “The low-price tier of Tampa was the best performing market nationally with five-year performance of 88%. The New York market was the best market annually, posting a gain of 8.9%. New York’s low-tier index, which include home values up to $533,000, helped drive that growth with 10.8% annual gains. Over five years, markets such as New York and Atlanta saw low-price-tiered indices outperforming their market by as much as 20% and 18%, respectively. The relative outperformance of low-price-tiered indices has both benefited first-time homebuyers as well as made it more difficult for those looking for a starter home. The opposite is happening in California, which has the most expensive high-price tiers in the nation, all well over $1 million. The rich are getting richer in San Diego, Los Angeles, and San Francisco where their high-price-tiered indices outperformed on a one- and three-year basis.”

Consumer confidence declined in September, according to the Conference Board. “Consumer confidence dropped in September to near the bottom of the narrow range that has prevailed over the past two years,” said Dana M. Peterson, Chief Economist at The Conference Board. “September’s decline was the largest since August 2021 and all five components of the Index deteriorated. Consumers’ assessments of current business conditions turned negative while views of the current labor market situation softened further. Consumers were also more pessimistic about future labor market conditions and less positive about future business conditions and future income.

The Present Situation Index has moved down markedly over the summer and continues to fall. Inflationary expectations remained elevated at 5.2%.

Mortgage applications rose 11% last week as purchases rose 1.4% and refis rose 20%. “Mortgage applications increased to their highest level since July 2022, boosted by a 20 percent increase in refinance applications after a large increase the prior week. The 30-year fixed rate decreased for the eighth straight week to 6.13 percent, while the FHA rate decreased to 5.99 percent, breaking the psychologically important 6 percent level,” Joel Kan, MBA’s Vice President and Deputy Chief Economist. “As a result of lower rates, week-over-week gains for both conventional and government refinance applications increased sharply. The refinance share of applications is now at 55.7 percent, and while the level of refinance activity is still modest compared to prior refi waves, they now account for the majority of applications, given the seasonal slowdown in purchase activity.”

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Morning Report: Retail sales rise

Posted on September 17, 2024 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning as the Fed begins its meeting. Bonds and MBS are up.

Retail Sales rose 0.1% MOM in August, according to the Census Bureau. This was better than the -0.3% expectation. July retail sales were revised upward by 0.1% to 1.1%. On a year-over-year basis, they rose 2.1%. Since these numbers are not adjusted for inflation, retail sales actually fell slightly YOY on an inflation-adjusted basis.

If you strip out vehicles and gasoline, retail sales rose 0.2% MOM and 3.3% YOY. This was a touch above inflation. Overall, it looks like the consumer remains in decent shape as we head into the back-to-school and holiday shopping seasons.

The Fed begins their FOMC meeting today. The Fed Funds futures have been more volatile than I can remember before a Fed meeting. The current handicapping has a 2/3 chance of a 50 basis point cut and a 1/3 chance of 25.

CNBC’s survey of money managers is leaning 86% towards a 25 basis point cut, FWIW. “We believe that the equivalent of eight cuts in six meetings is more than what will happen,″ John Donaldson, director of fixed income, Haverford Trust Co. wrote in response to the survey. “That forecast is more in line with a hard landing than a soft landing.”

Barry Knapp from Ironsides Macroeconomics says, “We suspect the FOMC will either under-promise or under-deliver, perhaps both.”

The December futures are still predicting a total 125 basis points in cuts this year.

Home prices rose 0.5% MOM in August, according to research from Redfin. On a year-over-year basis, they rose 6.7%. “Prices kept creeping up during this unusually slow summer for home sales as mortgage rates came down and supply remained stubbornly low,” said Redfin Senior Economist Sheharyar Bokhari. “If mortgage rates fall further this fall—and we expect they will—price growth will likely pick up as more prospective homebuyers come off the sidelines .”

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Morning Report: Awaiting inflation data this week

Posted on September 9, 2024 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning after getting roughed up last week. Bonds and MBS are down.

The week ahead will be dominated by inflation data with the consumer price index on Wednesday and the producer price index on Thursday. We are in the quiet period ahead of the FOMC meeting next week, so there won’t be any Fed speakers.

Fed Governor Christopher Waller said that the “time has come” to begin cutting rates. “If the data supports cuts at consecutive meetings, then I believe it will be appropriate to cut at consecutive meetings,” Waller said in remarks prepared for delivery at the University of Notre Dame. “If the data suggests the need for larger cuts, then I will support that as well. I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate.”

New York Fed President John Williams also supports cutting rates: “It is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate,” Williams said, in a speech prepared for delivery to the Council on Foreign Relations.

The base case for next week continues to be 25 basis points. Right now, the Fed Funds futures see a 75% chance of a 25 basis point cut and a 25% chance of a 50 basis point cut. The jobs report showed the labor market is softening, but not deteriorating which means the Fed doesn’t need to move with alacrity.

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Morning Report: Inflation comes in as expected

Posted on August 30, 2024 by Brent Nyitray

Vital Statistics:

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

Personal incomes rose 0.3% MOM in July, according to the Bureau of Economic Analysis. This was 0.1% above expectations. Consumption rose 0.5% MOM, which was in line with expectations.

The PCE Price Index rose 0.2%, in line with expectations, but was above May and June. The core rate, which excludes food and energy rose 0.2%, which was flat with June and in line with expectations. On an annual basis, the headline number rose 2.5% and the core rate rose 2.6%.

Bonds sold off slightly, and the Fed Funds futures now handicapping a 70% chance of a 25 basis point cut and a 30% chance of a 50 basis point cut. The strong spending number probably means the Fed will choose the less aggressive option.

Pending Home Sales fell 5.5% in July, according to NAR. The index fell to the lowest level on record, which goes back to 2001 when the index first started. “A sales recovery did not occur in midsummer,” said NAR Chief Economist Lawrence Yun. “The positive impact of job growth and higher inventory could not overcome affordability challenges and some degree of wait-and-see related to the upcoming U.S. presidential election. In terms of home sales and prices, the New England region has performed relatively better than other regions in recent months,” added Yun. “Current lower, falling mortgage rates will no doubt bring buyers into market.”

Affordability did improve somewhat in July, according to the MBA. The national median payment for purchase applicants fell from $2,167 to $2,140. “Homebuyer affordability conditions improved for the third consecutive month as rates below 7 percent and rising housing inventory continue to bode well for prospective homebuyers,”,” said Edward Seiler, MBA’s Associate Vice President, Housing Economics, and Executive Director, Research Institute for Housing America. “MBA is expecting that slower home-price appreciation, coupled with lower rates, will ease affordability constraints and lead to increased activity in the housing market.”

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Morning Report: New Home Sales rise

Posted on August 23, 2024 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning as we await Jerome Powell’s speech at Jackson Hole. Bonds and MBS are down.

Powell is set to speak at 10:00 am this morning. The FOMC minutes indicated that unless something dramatic happens, the Fed is set to cut interest rates at their September meeting. Powell will probably reiterate the Fed’s data-dependent mindset and confirm that a September rate cut is probably in the cards. Note that Kansas City Fed President Tom Harker said the Fed is ready to start cutting on CNBC yesterday. “I think it means this September we need to start a process of moving rates down,” Harker told CNBC’s Steve Liesman during a “Squawk on the Street” interview. Harker said the Fed should ease “methodically and signal well in advance….Right now, I’m not in the camp of 25 or 50. I need to see a couple more weeks of data,” he said.

Existing home sales rose 1.3% in July to a seasonally adjusted annual pace of 3.95 million, according to the National Association of Realtors. This snaps a 4 month losing streak which started in March. On a year-over-year basis, sales fell 2.5%. “Despite the modest gain, home sales are still sluggish,” said NAR Chief Economist Lawrence Yun. “But consumers are definitely seeing more choices, and affordability is improving due to lower interest rates.”

Total housing inventory rose 0.8% to 1.33 million units, which is up 19.8% compared to a year ago. The median home price rose to $422,600, up 4.2% compared to a year ago.

New Home sales rose by more than expected in July, increasing 10.6% to a seasonally adjusted annual rate of 739,000. This is still down about 5.8% compared to last year.

The Chicago Fed National Activity Index declined in July. Consumption and housing indicators improved, while production / income, employment, and sales indicators all fell.

The CFNAI is sort of a meta-index which gives a high-level view of the state of the economy. While the numbers don’t indicate recessionary territory, it does show a softening economy.

Filed under: Economy | 13 Comments »

Morning Report: Housing starts fall

Posted on August 16, 2024 by Brent Nyitray

Vital Statistics:

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

Housing starts declined to a seasonally-adjusted annual rate of 1.238 million. This is a 7% decline from a downwardly-revised June rate of 1.329 million, and down 16% compared to a year ago. Building permits fell 4% MOM and 7% YOY. Starts are at the lowest levels since May of 2020.

Homebuilder confidence declined in August as we await interest rate cuts. This is a decline from July and the lowest level since December last year. “Challenging housing affordability conditions remain the top concern for prospective home buyers in the current reading of the HMI, as both present sales and traffic readings showed weakness,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan. “The only sustainable way to effectively tame high housing costs is to implement policies that allow builders to construct more attainable, affordable housing.”

Homebuilder confidence is still stuck at the levels we saw during the post-bubble housing bust.

Mortgage delinquencies ticked up in the second quarter, according to the MBA. The delinquency rate rose 3 basis points QOQ to 3.97%. This is up 60 basis points compared to a year ago. “Mortgage delinquencies increased across all product types compared to this time last year,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “While delinquencies are still low by historical standards, the recent increase corresponds with a rising unemployment rate, which has historically been closely correlated with mortgage performance.”

Industrial production fell 0.6% in July, according to the Federal Reserve. This was well below Street expectations. Manufacturing production fell 0.3%, which was in line with expectations. Capacity utilization fell to 77.8%. We have known the manufacturing economy is struggling, and this report shows no indication of a turnaround.

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Morning Report: Housing inventory builds as affordability remains a concern.

Posted on August 9, 2024 by Brent Nyitray

Vital Statistics:

Stocks are lower as we finish up a turbulent week for markets. Bonds and MBS are up.

Active for-sale inventory rose 36% YOY, according to Realtor.com. The median listing price is down 0.7% YOY, while year-to-date listing prices are flat. Overall, we are getting to a more balanced home market.

The total value of US residential real estate rose to $49.6 trillion, according to research from Redfin. “The value of America’s housing market will likely cross the $50 trillion threshold in the next 12 months as there are not enough homes being listed to push prices down,” said Redfin Economics Research Lead Chen Zhao. “Mortgage rates have started falling, but many potential sellers and buyers are waiting to make a move, meaning we are likely to continue seeing a pattern where prices slowly tick up. That’s great news for the millions of American homeowners who see their equity rising, but first-time buyers are going to keep finding it tough to find an affordable home.”

Affordability continues to be terrible however, according to the Atlanta Fed:

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