Morning Report: Housing starts fall

Vital Statistics:

 LastChange
S&P futures3,712-20.50
Oil (WTI)83.370.38
10 year government bond yield 4.09%
30 year fixed rate mortgage 6.98%

Stocks are lower this morning after negative comments from Minneapolis Fed President Neel Kashkari. Bonds and MBS are down.

Minneapolis Fed President Neel Kashkari said the Fed may need to push the Fed Funds rate above 4.75% if core inflation keep accelerating. “Core services inflation — which is the stickiest of all — keeps climbing, and we keep getting surprised on the upside.” This, along with accelerating UK inflation put the kibosh on a two day rally in bonds.

Rising rates and home prices continue to depress housing starts. Starts were down 8.1% MOM and 7.7% YOY to a seasonally adjusted annual rate of 1.44 million. Building permits were up 1.4% MOM to 1.56 million.

Mortgage applications fell 4.5% as purchases fell 4% and refis fell 7%. This is the lowest level in 25 years. “The speed and level to which rates have climbed this year have greatly reduced refinance activity and exacerbated existing affordability challenges in the purchase market,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “Residential housing activity ranging from new housing starts to home sales have been on downward trends coinciding with the rise in rates. The current 30-year fixed rate is now well over three percentage points higher than a year ago, and both purchase and refinance applications were down 38 percent and 86 percent over the year, respectively.”

Fears of a recession and an increase in defaults have pushed up the yields on credit risk transfer securities, which are the insurance for mortgage backed securities issued by Fannie and Freddie. The junk-rated tranches of these securities are now double digits. So far, defaults and delinquencies are under control, but the markets are beginning to show some concern.

Author: Brent Nyitray

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

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