Morning Report: The services economy expands again.

Vital Statistics:

S&P futures3,997 12.50
Oil (WTI)77.46-0.70
10 year government bond yield 3.99%
30 year fixed rate mortgage 6.81%

Stocks are higher this morning despite more hawkish talk from central bankers. Bonds and MBS are flat.

The services economy expanded in February. “Business Survey Committee respondents indicated that they are mostly positive about business conditions. Suppliers continue to improve their capacity and logistics, as evidenced by faster deliveries. The employment picture has improved for some industries, despite the tight labor market. Several industries reported continued downsizing.”

The supplier deliveries index hit the fastest level since 2009, indicating that supply chain issues are mainly in the rear view mirror. The prices index declined, however it is still elevated. One respondent in IT said: “The current dynamics in the marketplace are such that it is getting harder to reduce costs. Most industries are being pinched by inflation and more expensive labor markets. Before, cost reduction was the goal; it’s now cost avoidance. That said, since we’re not able to reduce cost to maintain margins, we have to reduce the employee base more aggressively to achieve margins.”

Fed Governor Christopher Waller sounded hawkish in remarks yesterday: “I would be very pleased if the data we receive on inflation and the labor market this month show signs of moderation,” Fed governor Christopher Waller said in remarks posted on the Fed’s website. “But wishful thinking is not a substitute for hard evidence in the form of economic data. After seeing promising signs of progress, we cannot risk a revival of inflation.”

Nonfarm productivity rose 1.7% in the fourth quarter, according to BLS. This is a big downward revision from the initial 3% estimate. Output was revised downward while hours worked was revised upward. This is generally bad news for inflation, however we are talking about data that is getting pretty far in the past so I doubt it will influence the Fed all that much.

Unit labor costs rose 3.2%, which was driven by a 4.9% increase in compensation and a 1.7% increase in productivity. Manufacturing sector productivity declined 2.7%.

Fannie Mae updated its guidance on appraisals. The use of third-party data and models may now be used in some circumstances in lieu of an on-site appraisal. Fannie is changing the language from “appraisal waiver” to “value acceptance.” This should be good news for companies like Clear Capital who use technology to conduct valuations. DU will implement these changes on April 15.

UWM Corp (the parent of United Wholesale) reported fourth quarter numbers. Originations came in at $25.1 billion in the fourth quarter versus $33.5 billion in the third quarter and $55.2 billion a year ago. Gain on sale margins were more or less flat with Q3 at 51 bps.

The guidance for Q1 is for volume to come in between $16 and $23 billion, with gain on sale between 75 and 100 bps. This should translate into higher production revenue despite the drop in volume.

The Street sees Q1 earnings at breakeven and full year 2023 EPS at $0.20. Not sure how they continue to pay the $0.10 quarterly dividend. The stock yields 9.4%.

If you compare UWM’s numbers to Rocket’s it shows the vulnerability of Rocket’s model in a purchase environment. Rocket’s volumes were down much more dramatically, which shows it can dominate in a refi environment. Brokers, who are much closer to real estate agents, tend to capture more of the purchase business. You will ask your realtor for a lender recommendation in general. It will be interesting to see of Rocket’s ancillary services like Rocket Money will be able to capture some of that purchase business.


Author: Brent Nyitray

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

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