Morning Report: Small Business Optimism remains under pressure

Vital Statistics:

S&P futures4,04760.25
Oil (WTI)102.81-0.69
10 year government bond yield 2.98%
30 year fixed rate mortgage 5.58%

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.


Author: Brent Nyitray

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

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