Stocks are higher this morning after good earnings from Google and Microsoft. Bonds are up.
Personal incomes rose 0.5% MOM in March, while personal consumption rose 0.8%. Spending rose 0.8%, driven by increases in healthcare and housing. Again, I point to the vibecession here – high consumer spending is usually associated with economic booms, however when the increased spending is driven by non-discretionary items, it doesn’t feel like a boom. Nobody gets a recreational root canal.
The PCE Price Index – the Fed’s preferred measure of inflation came in more or less as expected. The monthly numbers were spot-on with estimates, while the annual numbers were slightly higher than expected. Given the recent increase in rates, the slight miss didn’t move yields higher – in fact, they are falling this morning.
The core PCE Price Index continues to work its way down, however you can see the stall early this year.
Pending Home Sales rose 3.4% in March, according to NAR. “March’s Pending Home Sales Index – at 78.2 – marks the best performance in a year, but it still remains in a fairly narrow range over the last 12 months without a measurable breakout,” said NAR Chief Economist Lawrence Yun. “Meaningful gains will only occur with declining mortgage rates and rising inventory. Home sales have lingered at 30-year lows, and since 70 million more Americans live in the country now compared to three decades ago, it’s inevitable that sales will rise in coming years,” explained Yun. “Inventory will grow steadily from more home construction, and various life-changing events will require people to trade up, trade down or move to another location.”
Stocks are lower this morning on bad earnings from Meta. Bonds and MBS are down.
First quarter GDP growth came in lower than expected, rising only 1.6% versus Street expectations of 2.3%. Consumption rose 2.5%, less than the 2.8% estimate. Consumption, government spending and fixed investment rose, while inventory investment declined. Spending on services increased (primarily healthcare and insurance) while spending on goods (driven by motor vehicles) declined. Note this might explain some of the vibecesion issues – consumers are spending, but not on fun stuff. They are just paying more for healthcare and insurance.
The PCE Price Index rose 3.4% compared to an increase of 1.8% in the fourth quarter. Excluding food and energy, the PCE Price Index rose 3.7% compared to 2% in Q4. We will get April’s PCE Price Index tomorrow.
In other economic news, durable goods orders rose 2.6% in March, which was a touch above expectations. If you strip out transportation, durable goods orders rose 0.2%. Core capital goods (a proxy for business capital expenditures) rose 0.2%. Initial Jobless claims fell to 207,000 last week.
PennyMac reported earnings yesterday. Origination volume fell 19% compared to the fourth quarter and 5% on a year-over-year basis to $21.7 billion. Servicing continues to be the bright spot as high interest rates keep prepays low, while delinquencies fell compared to Q4.
The Fed Funds futures still see little chance for a rate cut at next week’s FOMC meeting. They now see the most likely scenario as 1 rate cut this year. Big change in sentiment over the past couple of months.
Stocks are higher as investors like Tesla’s numbers. Bonds and MBS are down.
New Home Sales rose 8.8% MOM in March to a seasonally adjusted annual rate of 693,000. This is up 8.3% on a year-over-year basis. The median new home price fell 2% on a YOY basis to $430,700. There is an 8.3 month supply of homes for sale.
Pulte reported earnings per share that rose 32% compared to a year ago. Revenues rose 10% to $3.8 billion. Gross margins expanded 50 basis points YOY to 30%. CEO Ryan Marshall said this on the earnings conference call:
Against generally favorable demand conditions, the supply of available housing remains tight. We have a long-term structural issue resulting from a decade of under-building that has the country short approximately 4 million housing units. At the same time, the available inventory of existing homes for sale continues to be low as homeowners remain locked into their low mortgage rates. Life happens, so we are seeing some additional existing homes come to market, but the numbers remain well below historic rates.
As a homebuilder, this is a great operating environment as we are supplying a product that a lot of people need and want. I appreciate, however, that our country’s housing shortage can create hardships for today’s consumers as the lack of supply keeps housing prices high. In fact, some of our recent buyers said that they made the decision to buy now because they couldn’t wait any longer for rates to roll back.
In a market where home prices are high and because of limited inventory, they will likely continue moving higher. Our company’s ability to offer targeted incentives, particularly mortgage rate buy-downs, is a powerful tool that can help bridge the affordability gap. For example, in the first quarter, approximately 25% of our home buyers used our national rate program. In a world where the consensus is that interest rates will be higher for longer, our interest rate incentives likely become an even greater competitive advantage, especially relative to the existing home seller.
The environment for homebuilders couldn’t be better. The chart below looks at new home sales divided by the number of households in the US: Look how much we have underbuilt since the bubble years:
Like D.R. Horton, Pulte spent capital buying back stock instead of plowing every cent back into the business. I understand housing is cyclical, but when your ROE is 27%, buying back stock doesn’t make sense.
Mortgage applications fell 2.7% last week as purchases rose 0.2% and refis fell 6%. “Mortgage rates continued to move higher last week, reaching their highest levels since late 2023 and putting a damper on applications activity. The 30-year fixed rate increased for the third consecutive week to 7.24 percent, the highest since November 2023,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications declined, as home buyers delayed their purchase decisions due to strained affordability and low supply. The ARM share of applications increased to 7.6 percent, consistent with the upward trend in rates, as buyers look to reduce their potential monthly payments.”
Jamie Dimon is worried that stagflation might be returning to the US. “Yes, I think there’s a chance that can happen again,” he said during an appearance Tuesday at the Economic Club of New York. He is referring to stickier-than-normal inflation along with mediocre growth. Of course the difference the economy in the 1970s bears little resemblance to the economy of today, but it is a risk.
Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.
Mortgage REIT AGNC Investment reported earnings last night. Mortgage REITs are often the buyer of mortgage banking production, so it is useful to understand how they see the world.
“AGNC generated an economic return of 5.7% in the first quarter of 2024, as the favorable macroeconomic environment for fixed income investors that began in late 2023 persisted throughout the first quarter of 2024” said Peter Federico, the Company’s President and Chief Executive Officer. “Particularly beneficial for Agency mortgage-backed securities (‘Agency MBS’) investors in the first quarter, interest rate volatility declined meaningfully, Agency MBS spreads remained relatively stable, and the Federal Reserve indicated that short term rates had likely reached their pinnacle for this monetary policy cycle. Additionally, the Federal Reserve noted that a reduction in the pace of its balance sheet runoff would commence fairly soon, signaling that the quantitative tightening process was reaching its conclusion.
“Although the first quarter unfolded largely as expected and in a positive way, the start of the second quarter has illustrated that challenges remain. In April, interest rates and interest rate volatility increased meaningfully as the timing and magnitude of rate cuts in 2024 became increasingly more uncertain and as the conflict in the Middle East escalated. Despite this recent volatility, the underlying fundamentals for Agency MBS continue to give us reason for optimism. As a highly liquid, levered Agency MBS-focused investment vehicle, AGNC is well positioned to benefit from these favorable investment dynamics as they evolve over time.”
MBS spreads (which are the difference between the yield on a mortgage backed security and Treasuries) have contracted meaningfully since last fall. This means that while the 10 year has increased in yield, the mortgage rates have risen less.
Single-family detached homes remain the preference for two out of three homebuyers, according to the NAHB. Buyers would want a 30% discount to be indifferent between a single-family detached and a town house. According to the study, the finished lot accounts for only 18% of the final cost of a house, so it is difficult for builders to bridge this gap.
Stocks are higher this morning after a rough week. Bonds and MBS are down.
The big event this week will be the Personal Incomes and Outlays number on Friday, which will include the Personal Consumption Expenditures Price Index, which is the Fed’s preferred inflation measure. We will also get new home sales and the first estimate for Q1 GDP.
Chicago Fed President Austan Goolsbee said the Fed is on hold as progress on inflation has stalled out. “Given the strength of the labor market and progress on easing inflation seen over a longer arc, I believe the Fed’s current restrictive monetary policy is appropriate,” Goolsbee said during an appearance before a business journalism group in Chicago. “I think we have to recalibrate and we have to wait and see.”
He warned about housing being the big problem. “It is supposed to have been falling,” he said, citing the decline in market data on new leases. “If it doesn’t, it will be hard to see a smooth path back to our 2% inflation goal.” Translation: We need to see rents fall in order to start cutting rates.
The CPI subindex for housing is still elevated compared to pre-pandemic and pre-GFC. We probably need to see this sub-index get back to 4% or lower. It currently is 5.76%.
Economic activity increased in March, according to the Chicago Fed National Activity Index, which is a sort of meta-index of various economic indicators. The economy appears to be recovering from a bit of a slump in late 2023 and early 2024.
Stocks are lower this morning as tensions between Israel and Iran continue to simmer. Bonds and MBS are flat.
Existing Home Sales fell 4.3% in March to a seasonally adjusted annual rate of 4.19 million. This is down 3.7% on a year-over-year basis. “Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves,” said NAR Chief Economist Lawrence Yun. “There are nearly six million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market.”
On the bright side, inventory is increasing, rising 14.4% YOY to 1.11 million units. The median home price rose 4.8% YOY to $393,500. The first time homebuyer accounted for 32% of sales compared to 26% in February and 28% a year ago. Investors purchased 15%, down from 21% in February and 17% in March.
While these numbers were encouraging, they were before the big move upward in rates, so April’s numbers might not be so great.
The Index of Leading Indicators fell 0.3% in March after rising 0.2% in February. Over the past 6 months, the index has contracted 2.2%. “February’s uptick in the U.S. LEI proved to be ephemeral as the Index posted a decline in March,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Negative contributions from the yield spread, new building permits, consumers’ outlook on business conditions, new orders, and initial unemployment insurance claims drove March’s decline. The LEI’s six-month and annual growth rates remain negative, but the pace of contraction has slowed. Overall, the Index points to a fragile—even if not recessionary—outlook for the U.S. economy. Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024. The Conference Board forecasts GDP growth to cool after the rapid expansion in the second half of 2023. As consumer spending slows, US GDP growth is expected to moderate over Q2 and Q3 of this year.”
The LEI has been negative for a while, driven largely by the inverted yield curve. There is an old saying that an inverted yield curve has predicted 8 of the last 5 recessions – in other words, it is often a false signal. While a recession is not out of the question, the inverted curve has been a false signal for the past 18 months.
Homebuilder D.R. Horton reported a 24% increase in earnings per share for its second quarter. Homebuilding revenue rose 13% and gross margins expanded to 23% compared to 21% a year ago. The homebuilding business seems to be hitting on all cylinders: the company earned $1.2 billion in the quarter, and ROE was 22.2%.
Oddly, the company spent $450 million buying back its own stock. When the underlying business is that good, why aren’t they plowing that capital back into the business? Return on inventory is 30%.
Western Alliance reported earnings of $1.60 a share, which was up 20% compared to Q4 and 25% from a year ago. Book Value per share rose 13.8% YOY to $47.30. Charge-offs ticked up to $9.8 million, which was about .08% of average loans. Net interest margins contracted.
Deposits grew 12.5% QOQ and 30.7% on a YOY basis. It was about a year ago when Silicon Valley Bank failed which began a crisis in regional banks.
Mortgage originations rose 22% YOY to $9.7 billion, while gain on sale came in at 29 basis points. This was down 1 basis point compared to Q4 and up 3 compared to a year ago.
Good news for those who want to see shelter inflation decline: apartment conditions continue to loosen, according to the National Multifamily Housing Council. While single family building has been muted since the Great Recession, multifamily construction has been on a tear, leading to a record number of units under construction.
“Inflation has come in hotter than expected over the past few months – as the shelter component of CPI continues to lag moderating asking rents – which is expected to push back Fed rate cuts,” noted NMHC Senior Director of Research Chris Bruen. “This has translated to a 40-basis-point (bps) increase in the 10-Year Treasury yield and a decrease in the availability of debt financing over the past three months.”
“On the brighter side, however, this month’s survey results indicate that apartment sales volume has finally increased after seven consecutive quarters of declines. Meanwhile, the U.S. apartment market continues to absorb historic levels of new supply, resulting in rising vacancy rates and decreasing rent growth.”
Stocks are higher this morning on no real news. Bonds and MBS are up for once.
The Fed Beige Book didn’t give the indication of an economy growing at a rip-roaring pace. In fact, it almost seemed to contradict what we have been hearing from Fed speakers – that activity remains robust, that wages are increasing, and inflation remains persistent.
Overall economic activity expanded slightly, on balance, since late February. Ten out of twelve Districts experienced either slight or modest economic growth—up from eight in the previous report, while the other two reported no changes in activity. Consumer spending barely increased overall, but reports were quite mixed across Districts and spending categories. Several reports mentioned weakness in discretionary spending, as consumers’ price sensitivity remained elevated.
Employment rose at a slight pace overall, with nine Districts reporting very slow to modest increases, and the remaining three Districts reporting no changes in employment. Most Districts noted increases in labor supply and in the quality of job applicants. Several Districts reported improved retention of employees, and others pointed to staff reductions at some firms. Despite the improvements in labor supply, many Districts described persistent shortages of qualified applicants for certain positions, including machinists, trades workers, and hospitality workers. Wages grew at a moderate pace in eight Districts, with the remaining four noting only slight to modest wage increases. Multiple Districts said that annual wage growth rates had recently returned to their historical averages.
Price increases were modest, on average, running at about the same pace as in the last report. On balance, contacts expected that inflation would hold steady at a slow pace moving forward.
Lots of “slight,” “slow” and “modest characterizations, which seems to correspond more to the zeitgeist of the economy more than the actual numbers coming out of the government.
The comment that wage inflation seems to be slowing is good news for the services ex-shelter component of inflation, which is driven primarily by wage inflation.
The combination of rising rates and home prices have increased the monthly P&I cost on a mortgage 11%, according to research from Redfin. As mortgage rates surpass 7.4% and the median home price rises 5%, the median monthly payment rose 11% to $2,775, according to Redfin.
“Home sales are slower than usual, but there are still people buying and selling because if not now, when?” said Connie Durnal, a Redfin Premier agent in Dallas. “I’ve had a few prospective buyers touring homes for the last several years, since mortgage rates started going up, and they wish they would have bought last year because prices and rates are even higher now. My advice to them: If you can afford to and you find a house you love, buy now. There’s no guarantee that rates will come down soon.”
Stocks are rebounding this morning after hawkish comments from Jerome Powell yesterday. Bonds and MBS are stabilizing.
Jerome Powell pulled the rug out under bond bulls yesterday by acknowledging that inflation is too high and hinting that rate cuts are not coming any time soon. Punch line: Stick a fork in the June rate cut bet.
“The labor market remains very strong” as the unemployment rate remains under 4% for the longest period in more than half a century, Federal Reserve Chair Jerome Powell said on Tuesday. Even with this strength the labor market has been moving into better balance.
However, recent data demonstrates a lack of progress on inflation heading toward the Fed’s 2% target. That means it will likely take longer for the central bank to gain confidence that inflation is headed lower, he said at the Washington Forum on the Canadian Economy. As such, it’s appropriate to give the Fed’s restrictive policy more time to work”
The Fed funds futures now see one rate cut this year.
Mortgage applications rose 3.3% last week as purchases increased 5% and refis increased 0.5%. “Rates increased for the second consecutive week, driven by incoming data indicating that the economy remains strong and inflation is proving tougher to bring down. Mortgage rates increased across the board, with the 30-year fixed rate at 7.13 percent – reaching its highest level since December 2023,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Despite these higher rates, application activity picked up, possibly as some borrowers decided to act in case rates continue to rise. Purchase applications drove most of the increase, but remain at low levels of around 10 percent behind last year’s pace. Refinance applications increased very slightly, driven by a 3 percent gain in conventional applications.”
New Home mortgage applications rose 6.2% on a year-over-year basis. “March is typically a month when new home purchases see a seasonal boost, but this year March applications for new home purchases saw less than a one percent increase over the prior month on an unadjusted basis,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Applications were still ahead of last year’s pace, but at 6 percent, the annual growth rate was the slowest since September 2023. Homebuyers remain adversely impacted by strong home-price growth and mortgage rates hovering around 7 percent. The FHA share of applications did increase in March, exceeding 26 percent, compared to a 24 percent average for the prior 12 months. A higher FHA share can be a sign of more first-time buyer activity, but that segment of buyers is also more sensitive to affordability challenges.”
Stocks are flattish this morning after yesterday’s bloodbath. Bonds and MBS are down again.
Housing starts came in at 1.32 million in March, which was way below expectations. The number was down 14% month-over-month and 4% year-over-year. Building permits fell 4% MOM and rose 1% YOY to 1.46 million. This will not help alleviate the affordability issue, which is as bad as it was in the 1980s.
I discussed home affordability and compared the last bouts of expensive housing in my latest Substack article. Check it out and please consider subscribing.
Builder sentiment was flat in March, according to the NAHB / Wells Fargo Housing Market Index. High mortgage rates continue to be a headwind for the builders as it is keeping buyers on the sideline, hoping for a decline in borrowing costs.
Note the big builders are helping to alleviate that issue by offering buydowns via their captive mortgage originators. Builders generally pencil in about $40,000 in upgrades for their properties – i.e. things like granite countertops, better appliances etc. For a typical loan, $40k is about 10 points, so you can buy down the rate a lot. Plus it keeps the sales price unchanged which means the comps remain high.
Industrial production rose 0.4% in March, according to the Fed. The latest numbers indicate the manufacturing sector is rebounding after slowing from December through February. On a year-over-year basis production was flat, and generally corresponds to the ISM data along with the Fed surveys.
Bank of America reported first quarter earnings that dropped 8.4% if you strip out a special FDIC charge that most banks took in Q1. Higher deposit costs negatively impacted net interest income. Provisions for credit losses increased 14% QOQ and 40% YOY.
Mortgage origination volume fell 13% compared to the fourth quarter and a year ago. HELOC origination fell as well.
Stocks are higher this morning despite an attack on Israel from Iran over the weekend. Bonds and MBS are down.
The expected reaction in markets to the Iran / Israel situation is not happening: oil is down, bonds are down, and stocks are up. It sounds like de-escalation is the story markets are focusing on. The White House is telling Israel not to retaliate.
The week ahead will have some important housing data, but little that should move the bond market. Earnings season begins in earnest this week and we will also have quite a bit of Fed-speak.
Retail sales rose 0.7% month-over-month and 4% year-over-year in March, according to the Census Bureau. This number is not adjusted for inflation, so retail sales were roughly flat on an annual basis. February’s number was revised upward. That said, first quarter sales were up 2.1%% on an annual basis, so it does look like the consumer is beginning to get tired.
Where are they spending money? Going out, for the most part, as food and drinking establishments were up 6% on a YOY basis. Also on non-store retailers (i.e. Amazon Prime). Where are they not spending money? Anything home-related. Building materials, furniture, and electronics / appliances were down on a YOY basis.
I would add one thing on the food and drinking establishment data. Since the data is not adjusted for inflation, it would imply people might be going out less. I suspect menu prices increased more than 6% over the past year, at least it feels that way, which means people are going out less and spending more.
Another merger in the mortgage space; CMG Financial is buying Norcom’s retail assets. Norcom will continue to exist as a wholesale lender. “Norcom Mortgage has made the strategic decision to focus on and continue to grow our wholesale platform as TPO GO,” said Norcom President Phil DeFronzo. “We are very excited to have our amazing group of retail originators join the CMG family. CMG’s superior marketing platforms, technology, and product menu will enable our team to thrive and provide the best customer service in the industry.”
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