Morning Report: The market sees another 75 basis point hike next month

Vital Statistics:

S&P futures3,73158.85
Oil (WTI)111.782.24
10 year government bond yield 3.27%
30 year fixed rate mortgage 5.95%

Stocks are higher to begin this shortened week after a horrendous two weeks. Bonds and MBS are down.

There isn’t a lot of market-moving data this week, however Jerome Powell will head to the Hill for his semiannual Humphrey-Hawkins testimony. Aside from a lot of Fed-Speak, new home sales on Friday will be important.

The Fed Funds futures are predicting another 75 basis point hike at the July Fed meeting. This would imply about 150 basis points of tightening in the context of six weeks. This amounts to one of the biggest moves ever from the Fed, and the last time the Fed moved like this the overall interest rate environment was much higher. Going from 9.25% to 10.75% in the 80s probably has less of an impact than going from 0.5% to 2.25%.

With the Atlanta Fed’s GDP Now index predicting flat growth in Q2, the new home sales number will probably take on more significance than normal. Given the lousy housing starts number last week, I expect new home sales to come in weak as well, which will probably seal the deal for a negative Q2. That will make us officially in a recession.

So far, it doesn’t appear that there are any systemic issues in the financial markets. No blow-ups that spew counterparty risk all over the place. Corporate balance sheets are generally unleveraged, and most of the debt issuance during the pandemic was about refinancing existing debt and locking in low rates.

Growth decelerated in May, according to the Chicago Fed National Activity Index. This index is comprised of various economic indicators and is intended to be sort of a meta-index for the economy. The index fell to 0.1%, which is barely above trend. Sales and employment trends added to the index, while production, consumption and housing were weak spots.

New Residential is changing its name to Rithm Capital. It will now be an internally-managed REIT versus an externally managed one. “We are taking this opportunity to rebrand to Rithm Capital and demonstrate the growth of our Company,” said Mr. Nierenberg. “We have changed dramatically since our inception, from an owner of MSR assets to a company with complementary operating companies and a unique portfolio of investments. The new name and brand help distinguish us from our operating companies, including Newrez, and reflect our culture, team and ambitions for growth beyond residential mortgages.”

I have absolutely no idea what Rithm is supposed to mean. Is it an acronym? But this is definitely one of the stranger name changes since Nationstar rebranded as Mr. Cooper.

The company also declared its normal $0.25 dividend. This gives the stock a double-digit dividend yield. So far the anticipated dividend cuts in the mortgage space have yet to materialize.


Author: Brent Nyitray

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

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