Morning Report: Stock market sell-off continues

Vital Statistics:

	Last	Change
S&P futures	3,880	-40.25
Oil (WTI)	105.98	-3.69
10 year government bond yield		2.78%
30 year fixed rate mortgage		5.51%

Stocks are lower this morning, continuing off of yesterday’s bloodbath. Bonds and MBS are up.

The sell-off in the stock market has been pretty brutal. The VIX, which is an indicator of market pain is spiking, but is not overly elevated. The bottom of a sell-0ff is usually indicated with a dramatic spike. The chart below shows the VIX going back to 2000. You can see that the bursting of the tech bubble in 2000 didn’t really cause much of a spike, but the big spikes around 9/11, the 2008 financial crisis, Brexit, and COVID stand out. At least according to this indicator, we aren’t at maximum fear yet.

Despite the market sell-off, the index of leading economic indicators is still pretty strong. “The US LEI declined in April largely due to weak consumer expectations and a drop in residential building permits,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Overall, the US LEI was essentially flat in recent months which is in line with a moderate growth outlook in the near-term. A range of downside risks—including inflation, rising interest rates, supply chain disruptions, and pandemic-related shutdowns, particularly in China—continue to weigh on the outlook. Nevertheless, we project the US economy should resume expanding in Q2 following Q1’s contraction in real GDP. Despite downgrades to previous forecasts, The Conference Board still projects 2.3 percent year-over-year US GDP growth in 2022.”

Existing Home sales fell 2.4% in April, according to NAR. The median home price rose 14.8% to $391,200. It looks like home price appreciation is moderating a little. “Higher home prices and sharply higher mortgage rates have reduced buyer activity,” said Lawrence Yun, NAR’s chief economist. “It looks like more declines are imminent in the upcoming months, and we’ll likely return to the pre-pandemic home sales activity after the remarkable surge over the past two years.” Inventory is still extremely low, but is up marginally from a few months ago.

Mortgage applications fell 11% last week as purchases fell 12% and refinances fell 10%. Refinances are 76% lower than this time last year. “Mortgage rates – despite declining last week – remained over two percentage points higher than a year ago and close to the highest levels since 2009,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “For borrowers looking to refinance, the current level of rates continues to be a significant disincentive. Furthermore, general uncertainty about the near-term economic outlook, as well as recent stock market volatility, may be causing some households to delay their home search,” he said. These results were consistent with MBA’s May forecast released earlier this week, which now calls for fewer home sales and mortgage originations in 2022 compared to a year ago.”

Mortgage builder applications fell 14% in March, according to the MBA. “The spike in mortgage rates cooled demand and homebuilders continued to grapple with rising costs, supply-chain issues and extended completion timelines,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “With the supply of existing homes on the market still at extremely low levels, the new home market is an important source of housing supply. However, the pace of construction has slowed in recent months.”