Stocks are higher this morning after a good jobs report. Bonds and MBS are down.
The economy added 339,000 jobs in May, according to the Employment Situation Report. This was way bigger than the 190,000 the Street was looking for. Strangely, the unemployment rate ticked up from 3.4% to 3.7%, which was driven by a 310,000 decrease in the number of people employed. Seems odd.
Average hourly earnings rose by 0.3% MOM and 4.3% YOY. Wage inflation continues to decelerate, which is the Fed’s primary focus for inflation:
So, we saw in the ISM report that supply chain issues are done, and commodity price inflation is largely over. Home prices peaked a year ago, so this component of inflation is about to fade, though rents tend to lag home prices by about 21 months on average. And wage inflation continues to work its way lower. The Fed Funds futures are still leaning towards a pause at the FOMC meeting in a couple of weeks.
St. Louis Fed President James Bullard released a piece yesterday where he compared the current Fed Funds rate against the suggested rate using the Taylor Rule, which has been a widely-used model for monetary policy over the past 30 years. According to this model, which gives a range of rates, the Fed Funds rate is back in the range after a long time below it. Monetary policy was too tight in early 2019, and the Fed began easing in late 2019. It was correct afterward until late 2021, when the Fed got behind the curve.
“While both headline and core PCE inflation have declined from their peaks in 2022, they remain too high. An encouraging sign that inflation will decline to 2% comes from market-based inflation expectations, which had moved higher in the last two years but have now returned to levels consistent with the 2% inflation target. The prospects for continued disinflation are good but not guaranteed, and continued vigilance is required.”
Stocks are flat after the House passed the debt-ceiling bill. Bonds and MBS are up.
Philly Fed President Patrick Harker said the Fed “really should skip, not pause,” a rate hike at the June meeting. “I’m not saying that we’re not going to continue to tighten,” Harker said, citing sticky inflation, “but I think we can take a bit of a skip for a meeting” to assess how the aggressive tightening cycle that started in March 2022 has impacted the real economy. “The Fed doesn’t have to hike at every meeting.”
This comment caused a pretty dramatic shift in the Fed Funds futures, which now see a 75% chance of a pause in June after forecasting a 75% chance of a hike a few days ago.
If the Fed pauses in June, that should hopefully suck some volatility out of the bond market, which has been elevated since the Fed started tightening last year. The MOVE Index is sort of like a VIX for bonds shows how much volatility has increased:
Since MBS spreads are a function of interest rate volatility, any decrease should be supportive, which does pave the way for lower mortgage rates going forward, especially if the 10 year yield starts working its way lower.
First quarter productivity was revised upward from -2.7% to -2.1% as employment costs were revised downward from 6.3% to 4.2%. Unit labor costs were driven by a 2.1% increase in compensation and a 2.1% decrease in productivity. While negative productivity is never a good thing for inflation, the downward revision in unit labor costs is encouraging.
Private employers added 278,000 jobs in May, according to the ADP Employment Report. Annual pay increased 6.5%. The bulk of the jobs were added in leisure / hospitality, while construction and mining increased as well. We saw decreases in manufacturing and all of the white collar categories. “This is the second month we’ve seen a full percentage point decline in pay growth for job changers,” said Nela Richardson, chief economist, ADP. “Pay growth is slowing substantially, and wage-driven inflation may be less of a concern for the economy despite robust hiring.”
The manufacturing economy contracted for the 7th straight month, according to the ISM Manufacturing Report. The U.S. manufacturing sector shrank again, with the Manufacturing PMI® losing a bit of ground compared to the previous month, indicating a faster rate of contraction. The May composite index reading reflects companies continuing to manage outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period. However, there is clearly more business uncertainty in May.”
On the plus side, any supply chain issues from COVID appear to be long gone.
Stocks are lower this morning on no real news. Bonds and MBS are up.
Job openings ticked up in April, according to the JOLTs jobs report. Job openings were the highest in retail, health care and warehouse / transportation. The quits rate, which tends to precede wage growth slipped to 2.4%.
Mortgage Applications fell 3.7% last week as purchases fell 3% and refis fell 5%. Rates increased last week on hawkish Fed-speak. “Inflation is still running too high, and recent economic data is beginning to convince investors that the Federal Reserve will not be cutting rates anytime soon. Mortgage rates for conforming, balance 30-year loans were being quoted above 7 percent by some lenders last week, and the weekly average at 6.9 percent reached the highest level since last November,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Application volumes for both purchase and refinance loans decreased last week due to these higher rates. While refinance demand is almost entirely driven by the level of rates, purchase volume continues to be constrained by the lack of homes on the market.”
MBS spreads continue to remain at historically wide levels, which isn’t helping mortgage rates.
About a third of the mortgages originated pre-pandemic were refinanced during 2020 and 2021, according to a research report by the New York Fed. About 14 million mortgages were refinanced during the 7-quarter boom, of which about 2/3 were rate / term refis and the rest were cash-outs. The home equity extraction during the pandemic rivaled the bubble years on a gross dollar basis, but were much lower as a percentage of disposable income. All told, borrowers extracted about $430 billion in equity during the boom. The big question is whether that disposable income number is artificially inflated due to pandemic-related government spending which won’t be recurring.
Stocks are higher as investors return to a short week. Bonds and MBS are up.
It sounds like there is a deal on the debt ceiling, so that concern will disappear until 2025. I’m hoping this will help ease some of the pressure on the 10 year bond.
The week ahead will be dominated by the jobs report on Friday. We will also get home prices, productivity, and ISM data. This will be the last jobs report before the mid-June FOMC meeting. The Fed Funds futures currently see a 60% chance for another 25 basis point hike.
Consumer confidence declined in May, according to the Conference Board. “Consumer confidence declined in May as consumers’ view of current conditions became somewhat less upbeat while their expectations remained gloomy,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. “Their assessment of current employment conditions saw the most significant deterioration, with the proportion of consumers reporting jobs are ‘plentiful’ falling 4 ppts from 47.5 percent in April to 43.5 percent in May. Consumers also became more downbeat about future business conditions, weighing on the expectations index. However, expectations for jobs and incomes over the next six months held relatively steady. While consumer confidence has fallen across all age and income categories over the past three months, May’s decline reflects a particularly notable worsening in the outlook among consumers over 55 years of age.”
Inflationary expectations remain high, with consumers expecting 6.1% inflation over the next 12 months. This is down from the peak of 7.9%, but is well above the Fed’s 2% target. Note it is also above the University of Michigan survey as well.
Home prices rose 4.3% in the first quarter, according to the FHFA House Price Index. “U.S. house prices generally increased modestly in the first quarter” said Dr. Anju Vajja, Principal Associate Director in FHFA’s Division of Research and Statistics. “However, year over year prices in many western states have started to decline for the first time in over ten years.”
The fastest growing states were South Carolina, North Carolina, Maine, Vermont and Arkansas. North Carolina’s appreciation has been going for a while, but the other states are new on the leader board. The declining states include Utah, Nevada, California, Washington, and D.C.
Separately, the Case-Shiller home price index rose 0.7% in March. “The modest increases in home prices we saw a month ago accelerated in March 2023,” said Craig J. Lazzara, managing director at S&P DJI in a release. “Two months of increasing prices do not a definitive recovery make, but March’s results suggest that the decline in home prices that began in June 2022 may have come to an end.”
It noted big declines out West: “One of the most interesting aspects of our report continues to lie in its stark regional differences,” added Lazzara. “The farther west we look, the weaker prices are, with Seattle (-12.4%) now leading San Francisco (-11.2%) at the bottom of the league table. It’s unsurprising that the Southeast (+5.4%) remains the country’s strongest region, while the West (-6.2%) remains the weakest.”
Stocks are flat this morning as we head into a 3 day weekend. Bonds and MBS are down.
Personal Incomes rose 0.4% in April, while personal consumption rose 0.8%. The PCE Price Index (the Fed’s preferred measure of inflation) rebounded in April to 0.4%. On an annual basis PCE inflation rose 4.4%. If you strip out food and energy, PCE inflation rose 0.4% on a month-over-month basis and 4.7% on a year-over-year basis.
While the PCE Price index did show an uptick in April compared to February and March, the annual rate is still working its way lower.
This will be the last PCE data before the June Fed meeting which takes place from June 13-14. We will get the May employment numbers and the May CPI before then, but the markets and the Fed-speak seem to be hinting at another hike. The Fed Funds futures are now handicapping a better-than-50% chance of another 25 basis points in June. The strong consumption numbers give them the excuse to move further away from the zero bound.
The FOMC minutes indicated that the Fed still has a tightening bias, and that comports with some of the statements from various Fed presidents over the past couple of weeks. About the only statement that indicated any sort of dovishness was this:
Participants also discussed several risk-management considerations that could bear on future policy decisions. A few assessed that there were upside risks to economic growth. However, almost all participants commented that downside risks to growth and upside risks to unemployment had increased because of the possibility that banking-sector developments could lead to further tightening of credit conditions and weigh on economic activity. Almost all participants stated that, with inflation still well above the Committee’s longer run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook. A few participants noted that they also saw some downside risks to inflation.
Even that isn’t much for doves to hang their hat on. The regional banking stress seems to have dissipated, so any resulting tightening of credit will probably fade as well. Problems in the CRE market seem to be mainly concentrated in the office sector, although the lower-tier retail spaces might have some issues as well. Rental inflation will be something to watch as we approach the peak in real estate prices a year ago and apartment completions remain elevated.
In other economic data, first quarter GDP was revised upward from an increase of 1.1% to 1.3%. Initial Jobless claims ticked up to 229k, and durable goods orders increased 1.1%.
Pending Home Sales were flat in April, according to NAR. “Not all buying interests are being completed due to limited inventory,” said NAR Chief Economist Lawrence Yun. “Affordability challenges certainly remain and continue to hold back contract signings, but a sizeable increase in housing inventory will be critical to get more Americans moving.” Unfortunately a lot of the housing starts and completions are in multi-family, not single family.
Consumer sentiment slipped in May, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment slid 7% amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low from last June. This decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged. This month, sentiment fell severely for consumers in the West and those with middle incomes. The year-ahead economic outlook plummeted 17% from last month. Long-run expectations plunged by 13% as well, indicating that consumers are concerned that any recession to come may cause lasting pain. That said, consumer views over their personal finances are little changed from April, with stable income expectations supporting consumer spending for the time being.”
This is interesting given that consumer spending remains robust. Expectations regarding future inflation fell to 4.2% after rising to 4.6% in April. Long-run inflationary expectations ticked up however, although they remain around 3%. This will concern the Fed, as it wants long-term inflationary expectations at 2%.
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Stocks are lower this morning as investors continue to fret over the debt ceiling. Bonds and MBS are up small.
The MBA Secondary Conference just finished, and the consensus is that things are rough out there, but the mood seems hopeful that the worst is over. Here is Bob Broeksmit’s comments at the conference. Much of it discussed over-regulation, however he did say some things that give originators a sliver of hope over the spate of Fannie and Freddie repurchases:
Another policy fight we’re actively waging involves loan repurchases. As you’re well aware, Fannie and Freddie are demanding that lenders repurchase more and more loans, including seasoned performing loans, with minor underwriting issues.
Let’s put this issue in perspective. Many of these issues were the result of the unprecedented number of loans you processed in the early days of the pandemic. They reflect your swift action, during a national emergency, to help as many people as possible, as quickly as possible.
Not long ago, that action earned you well-deserved praise. Now, for all your heroic efforts, the GSEs are punishing you. They want you to buy back loans when interest rates are twice as high. That would be disastrous, putting further strain on your balance sheets.
But it doesn’t have to be this way. When it comes to loans with minor issues and seasoned performing loans, you should be allowed to address those issues through steps far short of repurchase. We’re making this point to the GSEs and FHFA regularly, and I’m confident you’ll see relief soon.
In the face of declining volumes and margins repurchases can put a lender out of business as we saw in 2008.
Mortgage Applications fell 4.6% last week as purchases fell 4% and refis fell 5%. “Mortgage applications declined almost five percent last week as borrowers remained sensitive to higher rates. The 30-year fixed rate increased to 6.69 percent, the highest level since March,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Since rates have been so volatile and for-sale inventory still scarce, we have yet to see sustained growth in purchase applications. Refinance activity remains limited, with the refinance index falling to its lowest level in two months and more than 40 percent below last year’s pace.”
If you look back long-term the state of the mortgage market is the worst in 25 years.
New home sales rose 4.1% on a MOM basis to a seasonally adjusted annual pace of 656,000. New home sales rose 11% on a YOY basis. The median new home price fell 8.2% YOY to $420,800, while the average home price fell 10.9% to $501,000.
Home prices peaked around June of last year, so we should start seeing the decline in prices percolate through to the inflation indices. That said, the Fed seems to be on a mission to take advantage of the robust labor market to build some distance from the zero bound which gives it more breathing room to ease if the economy slows.
The Fed Funds futures are now handicapping a 38% chance of another 25 basis point hike in June.
Stocks are flattish this morning on no real news. Bonds and MBS are down.
St. Louis Fed President James Bullard made some hawkish comments yesterday, saying the Fed might need to hike another 50 basis points. “The risk with inflation is that it does not turn around and go back to a low level…As long as the labor market is so good it is a great time to get this problem behind us and not replay the 1970s.”
San Francisco Fed President Mary Daly said that the Fed remains “data-dependent.” “We have to be extremely data-dependent, and that’s why, even three weeks in advance of the meeting, our next meeting, it’s still a lot of time to collect information before we make a decision about what to do in June or what to do for the rest of the year,” Daly said in a virtual appearance before a gathering held by the National Association for Business Economics and Banque de France. Daly said “it’s a distraction really, to say what we’re going to do necessarily in June” and that attention is better focused on what the Fed is looking at to drive its policy choices. “Meeting-by-meeting decisions become really the most prudent path” for central bankers right now, she said.
Home improvement retailer Lowe’s reported soft comp sales on falling lumber prices and weakening demand for discretionary items. With the housing market so starved for inventory, you would expect to see more consumer interest in upgrading their current residences.
There still isn’t a deal on the debt ceiling, but talks are productive, according to comments from House Speaker Kevin McCarthy and President Biden. Even if the government doesn’t raise the debt ceiling, the chance of the US missing payments on its debt is remote. The government can always prioritize interest and principal over other spending.
Stocks are flattish this morning on no real news. Bonds and MBS are flat.
The week ahead has some important economic data with new home sales, GDP and Personal Incomes / Outlays. The Personal Income / Outlays report contains the Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation. Markets will close early on Friday for the Memorial Day Weekend.
We will also get the minutes from the May FOMC meeting on Wednesday. That will be interesting since there should be plenty of discussion about the regional bank situation. I want to see how many voters were willing to pause rate hikes, but went along with the consensus.
Minneapolis Fed President Neel Kashkari said that even if the Fed pauses rate hikes in June, the markets shouldn’t take that as an all-clear signal. “Right now it’s a close call either way, versus raising another time in June or skipping,” the central bank official said on CNBC’s “Squawk Box.” “Some of my colleagues have talked about skipping. Important to me is not signaling that we’re done. If we did, if we were to skip in June, that does not mean we’re done with our tightening cycle. It means to me we’re getting more information. Markets seem very optimistic that rates are going to fall now. I think that they believe that inflation is going to fall, and then we’re going to be able to respond to that. I hope they’re right,” he added. “But nobody should be confused about our commitment to getting inflation back down to 2%.”
Despite 500 basis points of tightening, the economy remains quite strong. The Atlanta Fed’s GDP Now Index sees Q2 growth at 2.9%.
Troubled regional bank PacWest is up this morning after reaching a deal to sell a portfolio of construction loans to an investment firm. The regional banks are all up in sympathy this morning.
Mortgage applications for new home sales rose 4.1% in April, according to the MBA. “Purchase applications for newly constructed homes declined in April but were up 4 percent compared to a year ago,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “This was the third straight month of year-over-year growth in applications, which signals improving housing demand for newly built homes at a time when the broader housing market is leaning more on new construction to boost for-sale inventory levels. Mortgage rates have settled in the 6.5 percent range lately and remain over a percentage point higher than last year. The higher mortgage rate environment continues to factor into homebuying and selling decisions.”
Stocks are higher this morning on no real news. Bonds and MBS are down. Jerome Powell will be speaking at 10:00 am.
Bond yields have been climbing, much to the chagrin of mortgage bankers. Over the past week, the 10 year has tacked on 24 basis points in yield. Some of this is probably due to hawkish comments out of the Fed, but it appears to be global, with the German Bund, UK Gilt, and Japanese Government Bond all moving up in lockstep.
I suspect some people have been hoping that this increase was driven by debt ceiling theater and once we get a resolution yields will begin falling. That might not be in the cards unless the US hits a recession. Note the Atlanta Fed GDP Now model sees 2.9% growth in Q2, which is pretty robust. That said, the GDP Now model was consistently too high in Q1.
Independent Mortgage Banks lost $1,972 on each loan they originated in Q1, according to the MBA. This is an improvement from the $2,812 they lost in the fourth quarter.
“A net production loss of 68 basis points in the first quarter of the year is an improvement over the record 99-basis-point loss reported in the fourth quarter of 2022,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Conditions continue to be challenging for the industry, with now four consecutive quarters of production losses and nine consecutive quarters of volume declines.”
Added Walsh, “One silver lining from the first quarter is that production revenues improved by 40 basis points. However, costs continued to escalate with the further drop in volume and reached more than $13,000 per loan despite substantial personnel reductions.”
The Index of Leading Economic Indicators declined again in April, according to the Conference Board. “The LEI for the US declined for the thirteenth consecutive month in April, signaling a worsening economic outlook,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Weaknesses among underlying components were widespread—but less so than in March’s reading, which resulted in a smaller decline. Only stock prices and manufacturers’ new orders for both capital and consumer goods improved in April. Importantly, the LEI continues to warn of an economic downturn this year. The Conference Board forecasts a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023.”
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Stocks are flattish this morning as retail earnings come in. Bonds and MBS are down.
Bonds are down this morning after Dallas Fed President Lorie Logan said that inflation is still too high to consider pausing rate hikes. “The data in coming weeks could yet show that it is appropriate to skip a meeting,” Logan said in remarks prepared for delivery to the Texas Bankers Association in San Antonio, referring to the Fed’s twice-quarterly policy-setting meetings, the next of which takes place June 13-14. “As of today, though, we aren’t there yet.” The June Fed Funds futures are now handicapping a 37% chance of another 25 basis point hike at the June meeting.
The debt ceiling issue isn’t helping either, but for the most part it is nothing more than kabuki theater. The debt ceiling always gets raised, and if it doesn’t the government “shuts down” which usually means they close down the parks in Washington DC and not much else. Principal and interest on the debt still gets paid. FWIW, it looks like both sides are inching towards a deal.
WalMart reported strong comp sales this morning, bucking the trend seen by Home Depot and Target. It looks like WalMart is a beneficiary of inflation, as shoppers eschew more expensive stores and bargain-hunt.
Existing home sales fell 3.4% in April, according to NAR. On a YOY basis, sales were down 23.2%. The median home price fell 1.7% compared to a year ago. “Roughly half of the country is experiencing price gains,” Yun noted. “Even in markets with lower prices, primarily the expensive West region, multiple-offer situations have returned in the spring buying season following the calmer winter market. Distressed and forced property sales are virtually nonexistent.” Inventory rose 7% MOM and 1% YOY.
In other economic news, initial jobless claims fell to 242k, while the Philly Fed Index improved, while remaining negative. The Philly Fed index showed that price inflation dropped to the lowest level since mid-2020. The prices received index declined for the third month in a row and hit -3.3, which means more companies are reporting decreases in prices received than increases. FWIW, it looks like the prices diffusion index is back to normal.
The Daily Tearsheet 