Morning Report: GDP falls in Q1

Vital Statistics:

 LastChange
S&P futures4,21837.25
Oil (WTI)101.82-0.09
10 year government bond yield 2.85%
30 year fixed rate mortgage 5.32%

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. 

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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