Stocks are flattish this morning as oil continues to climb. Bonds and MBS are flat.
The economy grew modestly over the past 6 weeks according to the Fed’s Beige Book. Consumer spending grew moderately despite higher gasoline prices. The labor market continued its low hire / low fire state, while price inflation was more or less steady. Residential construction declined, however data center building offset it. As an aside, I wonder how much data center construction is drawing away skilled labor from resi construction.
Given that backdrop, it is surprising to see the Atlanta Fed’s GDP Now model predicting Q3 GDP growth at a torrid 4.8%. Note particularly the chasm between the Atlanta Fed model and the Street consensus, which sees something like 2.4%. The ISM reports are doing a lot of heavy lifting in the model.
Private residential construction spending continues to be under pressure according to the NAHB and the latest construction spending report. It fell 1.3% MOM and 7.3% YOY. Single family construction accounted for all of the decline. Blame high mortgage rates and a glut of inventory with the builders. All of the publicly-traded homebuilders reported lower gross margins, which indicates price cuts. Most builders are allocating spare capital to buying back stock instead of expanding and lot purchases.
Despite the claims of the housing advocates, there is not a shortage of homes. The builders are sitting on inventory levels that rival the glut before the 2008 housing crash:
They aren’t building more until that inventory gets worked off. Multifamily tells a similar story. Construction of 5+ unit structures during the low-interest rate post COVID years soared, especially in places like Phoenix and Austin. Average asking rents have been declining for 4 years as the new inventory gets absorbed.
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As anyone who hedges their pipeline knows, volatility is the enemy of margin. Big moves in the markets can depress loan bids and make hedges underperform. Swaptions provide a way to buy some insurance against that risk. If you are hedging your MSR portfolio or Non-QM loans for sale, SOFR swaptions may be a good fit.
Exchange traded swaptions also have the benefit of no upfront premium, no counterparty risk, and better execution than a over-the-counter (OTC) option. In an OTC transaction, you contact a bank who will “take the other side” of your trade. So they can sell you an expensive option and then buy it back cheaply when you want to exit since they know your position (or “which way you are”). On an exchange, you will get better pricing because the counterparties are anonymous and have no knowledge about your position.
Contact John Douglas at www.erisfutures.com to learn more.
The CME has an article discussing exchange-traded SOFR swaptions, which are options on Eris SOFR Swap Futures. It is a good backgrounder on how they work, what the advantages of them are, and talks about how you don’t need to be a huge bulge bracket bank anymore to take advantage of them. Lower margin requirements are also helpful for mortgage banks who need to maintain maximum liquidity.
The article is an excellent backgrounder for those who want to learn more about how these instruments are traded. Anyone thinking about hedging non-QM and MSR positions should take a deep dive and understand the possibilities.
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New York Fed President John Williams said that rising bond yields are being driven by strong economic growth, not market dysfunction. “What’s driving it, in large part, is … really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general,” he said. “So, I think it’s not really about financial conditions affecting the economy. It’s more about the economy affecting financial conditions.”
I would add that the increase in bond yields is global and not limited to the US. Japan has seen nearly a 100 basis point rise in yields year-to-date, with Europe seeing similar increases to the US.
We wouldn’t say whether he supported a hike at the September meeting. “I think that we have to wait and see. There’s no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that.”
“The [inflation] data recently have been encouraging towards that, but again we can’t just look a month or two. We’ve got to get a full picture and and look at all the … different pieces of information we have,” he added.
The September Fed Funds futures are still leaning towards a hike, with a 62% probability.
Announced job cuts rose 38% MOM but fell 38% YOY, according to the Challenger Gray and Christmas Job Cut report. This is the lowest August since 2022, and is consistent with the low hire / low fire labor market.
“This is the quietest August since 2022, but is generally on average for the month since the mid-2010s. What we’d like to see with low layoffs is an increase in hiring activity. While companies are making plans to hire more workers than last year, according to our numbers, it doesn’t appear those positions are being filled quickly,” said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.
Year-to-date, technology leads with the most announced job cuts, followed by transportation. While it is tempting to name AI as the reason for the cuts, AI is the fourth-most cited reason. Restructuring is the top one, followed by economic conditions and closings. Note that even if AI is the reason, companies will be reluctant to say that.
Surprisingly, the tech sector led in hiring, so there appears to be some churn going on as software is struggling while AI is growing.
