Author: Brent Nyitray

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down.

We are starting to see a slowdown in consumer spending as the Fed’s drastic tightening cycle begins to gain traction on the economy. Yesterday, Home Depot reported weaker earnings, particularly on big-ticket items like grills and furniture. Today, Target reported first quarter earnings, and forecasted low single-digit comps for the rest of the year. Consumers are buying more non-discretionary items and buying fewer discretionary items. This comports with studies that show consumers are saving more amidst fears of a recession.

Housing starts rose 2.2% MOM to a seasonally-adjusted annual rate of 1.4 million. This is a 2.2% increase from March, but is down 22% from a year ago. Building Permits fell 1.5% MOM and 21% YOY to a seasonally-adjusted annual rate of 1.4 million.

Western Alliance gave an update on deposits after the close yesterday. Deposits have increased by $2 billion since the end of Q1. Insured deposits are over 79% and the company is close to completing the sale of about $3 billion in loans held for sale. The stock is up 13% pre-open.

Mortgage Applications decreased 5.7% last week as purchases fell 4.8% and refis fell 8%.

“Mortgage rates increased last week even as Treasury yields were essentially flat, with the spread between the two rates widening to 310 basis points. Mortgage application activity slowed, as most mortgage rates in the survey increased, with the 30-year fixed rate jumping nine basis points to its highest level in two months at 6.57 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications decreased 5 percent to its slowest pace in a month, as buyers remain wary of this rate volatility, but also as for-sale inventory in many parts of the country remains scarce. Refinance applications accounted for 27 percent of all applications and dropped almost 8 percent last week. Most borrowers have lower rates on their mortgages, and those who are in the market are extremely rate sensitive.”

You can see the difference between the 30 year fixed rate mortgage and the 10-year in the graph below: We are back at levels last seen during October and the Great Recession:

Prior to the Great Recession the last time spreads were this high was the early 1980s.

Vital Statistics:

Stocks are lower after a weak retail sales report. Bonds and MBS are down.

Retail Sales rose 0.4% MOM in April, according to Census. Sales rose 1.6% on a YOY basis, however these numbers don’t take into account price changes, so on an inflation-adjusted basis retail sales are down. March’s numbers were revised upward slightly.

If you strip out autos and gas, retail sales rose 0.6% MOM. We saw big decreases in electronics, furniture and gasoline. Food and drinking establishments saw big gains.

Separately, the Home Despot reported a big miss on the top line and guided for lower comparable sales for the rest of the year. Falling lumber prices is playing a part here, although it appears that homeowners are putting bigger remodeling projects on the back burner. Chief Financial Officer Richard McPhail told CNBC “The state of the homeowner is that they’re very healthy,” he said. “They have healthy balance sheets. They have healthy incomes. But I do think — and our professional customers tell us they hear this from their customers — there is that shift, even if it’s temporary from larger projects into smaller ones.”

Homebuilder sentiment improved in May according to the NAHB. After dropping at the end of 2022, sentiment is improving. Traffic remains low, and lumber prices continue to work their way lower.

Industrial Production rose 0.5% in April, according to the Fed. February and March were revised lower. Manufacturing production rose 1% and capacity utilization fell to 79.7%. Overall, it looks like manufacturing is sluggish. This is despite a sizeable drop in the US dollar over the past 6 months.

The FHFA is requesting input on G-fees. “Through this RFI, FHFA seeks input on how to ensure the pricing framework adequately protects the Enterprises and taxpayers against potential future losses, supports affordable, sustainable housing and first-time homebuyers, and fosters liquidity in the secondary mortgage market,” said Director Sandra L. Thompson. “We are committed to being transparent and to considering views from a diverse set of stakeholders and market participants.”

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Vital Statistics:

Stocks are higher this morning as investors reach for risk. Bonds and MBS are down.

The week ahead won’t have much in the way of market-moving data, but we will get a lot of housing indicators with housing starts, existing home sales and homebuilder sentiment.

Business activity increased in New York State last month, according to the Empire State Manufacturing Survey. New orders and shipments surged, while employment remains weak. Inflation continues to trend down, with input prices falling while prices received were flat.

Atlanta Fed Chairman Raphael Bostic doesn’t see rate cuts this year, as inflation is still too high. “What we’ve seen is that inflation has been persistently high, consumers have been really resilient in terms of their spending, and labor markets remain extremely tight. All of those suggests that there’s still going to be upward pressure on prices,” he said. “If there’s going to be a bias to action, for me would be a bias to increase a little further as opposed to cut.”

PacWest is down again pre-market and were are getting more discussion about banning short selling in bank stocks. FWIW, I have always been skeptical about short selling bans in general – governments only step in after the easy money has been made, and in many cases the borrow in these names is already expensive.

When you short a stock, you have to find someone to lend you the stock to sell. This borrowed stock is what you deliver to the buyer on trade settlement date. Your prime broker will charge you a fee to borrow that stock, and we are seeing fees in the high teens and up. This means that your prime broker is lending you PacWest stock at a 20% fee, you will be paying about 40 basis points a week to maintain that position.

I think at this point, short sellers are not driving the price action in these names. There simply isn’t a deep borrow in these names and it costs a lot of money to borrow them. I suspect that many holders of these stocks will simple choose to not lend them out any more, which will make it difficult to short in the first place, and may force people with established short positions to exit them.

Lending standards are tightening across the board, especially for commercial real estate and residential lending. For residential, the tightening was more pronounced in jumbo and Non-QM as opposed to GSE and government loans. We are seeing weaker demand for HELOCs and other residential real estate loans.

Banks are also tightening standards on multi-fam, by increasing spreads, hiking covenants and lowering LTVs.

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are flat.

Consumer sentiment slipped in May, according to the University of Michigan Consumer Sentiment Survey. This is down 9.1% from April. Consumer expectations fell 11% despite a strong labor market. Inflationary expectations for the near term fell, while longer-term expectations rose to 3.2%, the highest level in 12 years.

We know the Fed pays close attention to the UM inflationary expectations, so this is bad news for those hoping for rate cuts this year.

Mortgage delinquency rates fell 3.56% in the first quarter, according to the MBA. This is down 40 basis points from the fourth quarter and 55 basis points from a year ago.

“The mortgage delinquency rate fell to its lowest level for any first quarter since MBA’s survey began in 1979 and was the second lowest quarterly rate overall, just 11 basis points above the survey low in the third quarter of 2022,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Mortgage delinquencies and the unemployment rate continue to track each other closely, with the unemployment rate in April falling back to the 54-year low of 3.4 percent set in January. Consistent with the resilient job market, the performance of existing mortgages is exceeding expectations. Across all states, there was an improvement in the first quarter compared to one year ago. Year-over-year delinquencies for all product types – FHA, VA, and conventional – were also down.”

Unemployment and delinquencies correlate pretty tightly:

Fed Governor Michelle Bowman spoke in Germany this morning. Here are her prepared remarks. Her comments were pretty hawkish on monetary policy, and nothing remote suggests rate cuts are coming in the near future, though the Fed Funds futures see cuts as imminent.

In my view, our policy stance is now restrictive, but whether it is sufficiently restrictive to bring inflation down remains uncertain. Some signs of slowing in aggregate demand, lower numbers of job openings and more modest gross domestic product (GDP) growth indicate that we have moved into restrictive territory. But inflation remains much too high, and measures of core inflation have remained persistently elevated, with declining unemployment and ongoing wage growth. And, as senior loan officers signaled beginning last summer, credit has continued to tighten.² I expect this trend will continue given increased bank funding costs and reduced levels of liquidity.

Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time. I also expect that our policy rate will need to remain sufficiently restrictive for some time to bring inflation down and create conditions that will support a sustainably strong labor market.

Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are up on the PPI data. The Bank of England hiked by 25 bp this morning.

Inflation at the wholesale level came in at 0.2% month-over-month and increased 2.3% on a year-over-year basis. Ex-food and energy, prices rose 0.2% MOM and 3.4% YOY. These numbers were below expectations, and bonds are rallying on the news.

Initial Jobless Claims rose to 264k last week. You can see in the chart below that the claims are on the way up, after a long period at 50 year lows.

The Fed Funds futures have taken further rate hikes off the table, and are handicapping a roughly 50% chance of a 25 basis point cut at the July meeting.

The FHFA has announced it will rescind the upfront fees based on borrowers’ DTI. “I appreciate the feedback FHFA has received from the mortgage industry and other market participants about the challenges of implementing the DTI ratio-based fee,” said Director Sandra L. Thompson. “To continue this valuable dialogue, FHFA will provide additional transparency on the process for setting the Enterprises’ single-family guarantee fees and will request public input on this issue.”

United Wholesale reported first quarter volume of $22.3 billion, which was a 11% decline from the fourth quarter and 43% decline from a year ago. Gain on sale rebounded to 92 bps from 51 in the fourth quarter. They were still down from 99 bp a year ago. The company forecasts Q2 volume between $23 and $30 billion, with gain on sale margins from 75 to 100 bps.

Western Alliance gave an update on its deposit situation. Total deposits were 49.4 billion, up $1.8 billion from the end of last quarter and up $600 million from last week. Insured deposits are 79% and liquidity covers uninsured deposits by 2x.

PacWest said that deposits fell by 9.5% in the week ended May 5. Available liquidity is about 3x the level of uninsured deposits. The regional banks continue to be under pressure overall, as the S&P SPDR regional bank ETF is down 38% YTD.

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Vital Statistics:

Stocks are higher after the Consumer Price Index fell last month. Bonds and MBS are up.

Consumer prices rose 0.4% MOM and 4.9% YOY in April. This was slightly below street estimates. Ex-food and energy, prices rose 0.4% MOM and 5.5% YOY. Shelter was the biggest driver of the increase, followed by used cars and trucks. The shelter component should pretty much disappear as we reach the 2022 peak in house prices in June.

Mortgage applications increased 6.3% last week as purchases rose 5% and refis increased 10%. “Mortgage applications responded positively to a drop in rates last week, as the Fed signaled a potential pause at the current level for the federal funds rate in anticipation of inflation slowing and tightening financial conditions that will slow economic and job growth. Mortgage rates for all surveyed loan types decreased over the week with the 30-year fixed rate at 6.48 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications increased 5 percent last week but were still more than 30 percent below last year’s level. Lower rates from week to week have helped buyers in the market, but limited for-sale inventory remains a challenge for many homebuyers. Refinance activity jumped 10 percent to its highest levels since September 2022, although there is only a small pool of borrowers who can benefit from refinancing with rates at these levels.” 

NY Fed Chairman John Williams said that it will take a couple of years for inflation to get back to the Fed’s 2% target. He also cautioned against forecasts for rate cuts this year: “First of all, we haven’t said we’re done raising rates,” Williams told CNBC’s Sara Eisen during a Q&A session after his speech. “We’re going to make sure we’re going to achieve our goals and we’re going to assess what’s happening in our economy and make the decision based on that data. I do not see in my baseline forecast, any reason to cut interest rates this year.”

Loan Depot originated $5 billion in the first quarter of 2023, which was a 23% decrease from the fourth quarter. That said, gain on sale margin increased substantially from 145 to 243 basis points. “The first quarter of this year remained challenging for the housing market as virtually all participants grappled with the impacts of ongoing volatility in mortgage interest rates, persistent cost inflation and the lack of available homes for sale,” said President and Chief Executive Officer Frank Martell. “Although the affordability and availability of new and existing home sales remains challenging for the industry overall, we expect to continue to benefit from seasonally higher revenues and our ongoing cost reduction program. Assuming the expected benefits of continuing seasonal volume increases and cost productivity, we expect to deliver improving financial results over the course of the second and third quarters of 2023.” The company is forecasting for gain on sale to improve again in the second quarter to a range of 240 to 280 basis points.

Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are down.

Banks reported tightening credit standards and weakening demand in the latest Federal Reserve Senior Loan Officer Survey.

“Regarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to large and middle-market firms as well as small firms over the first quarter.² Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.”

“For loans to households, banks reported that lending standards tightened across all categories of residential real estate (RRE) loans other than government-sponsored enterprise (GSE)-eligible and government residential mortgages, which remained basically unchanged. Meanwhile, demand weakened for all RRE loan categories. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Standards tightened for all consumer loan categories; demand weakened for auto and other consumer loans, while it remained basically unchanged for credit cards.”

Small Business Optimism fell again in April, according to the NFIB. The is the sixteenth consecutive reading below the historical average. Quality of labor is the biggest concern, with manufacturing, construction and transportation showing the biggest shortages. Inventories now are too high relative to expected sales. Inflation seems to be waning.

A banking crisis does not appear to be a major risk. The bank failures were not due to bad loans, the usual cause. Defaults will rise as the economy weakens but hopefully not at pandemic levels. The manufacturing sector appears to be in contraction (ISM <50). The service sector is still in growth mode, but much weaker (ISM 51.2, down 3 points). Main street firms have been pessimistic for the last 18 months, with the NFIB Optimism Index at 89 (49 year average = 98). Price raising activity has slowed but remains historically high, and reports of higher labor compensation are sticky at historically high levels. This will make inflation sticky as labor costs are the major operating cost of small firms, especially in the service sector. The economy seems inclined to slow down and this will make raising prices harder and slow inflation. Maybe it’s time for the Fed to pause and let nature (markets) take its course.

Rate lock volume fell 22% in April, according to Black Knight. Part of this is due to more business days in March, however volumes fell 10% even after taking this into account. Overall lock volumes rose 14% over the past 3 months, however they are down about 50% from a year ago.

“Home prices rose a seasonally adjusted 0.45% in March at the national level,” said Walden. “A modest bump in homebuyer demand ran headlong into falling for-sale supply, leading to the third consecutive monthly increase in home prices after they’d been pulling back from recent peaks through the tail end of 2022, essentially nationwide. In fact, just five months ago, prices were declining on a seasonally adjusted month-over-month basis in 92% of all major U.S. markets. Fast forward to March, and the situation has done a literal 180, with prices now rising in 92% of markets from February. Despite the home price strengthening of these past couple of months, the backward-looking annual growth rate continued to cool as the influence of the red-hot spring 2022 market fades in the rearview mirror. Prices are now up just 1.0% year over year, with the annual growth rate on track to fall to roughly 0% by April.  That said, low inventory levels will limit just how far that metric will fall in coming months.”

Vital Statistics:

Stocks are higher this morning as the regional banks rally. Bonds and MBS are down.

PacWest cut its dividend to conserve cash, which has caused the stock to rally. Generally dividend cuts are not received well by investors, but PACW is up 21% this morning. Don’t see that too often. Western Alliance is up, along with Comerica and KeyBank.

The week ahead will be generally data-light, with the exception of the consumer price index on Wednesday. The Case-Shiller Home Price Index peaked in June of 2022, so we are pretty close to having the owner’s equivalent rent portion of the CPI fade into the background. The labor market remains super-tight however.

Charlie Munger warned that commercial real estate is going to be a growing problem. ” A lot of real estate isn’t so good any more. We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.” Office is clearly a problem, and I don’t see that going away. Apartment supply is elevated as well, especially in urban areas. While nobody is calling this another 2008 problem, valuations are collapsing in the office space.

The pain in the commercial real estate sector, along with the problems with the regional banks will have a further tightening effect on the economy. Credit will become more restricted, which gives the Fed more leeway to stand pat in June. The debt ceiling kabuki theater can also help if the Federal Government manages to actually cut spending. The Federal Government used a lot of fiscal stimulus during the pandemic, and that helped stoke the demand we are seeing now. This is an unappreciated contributing factor to inflation and while the Fed has been taking steps to reduce demand, the Federal government has not.

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Vital Statistics:

Stocks are higher after the jobs report. Bonds and MBS are down.

The economy added 253,000 jobs in April, which came in above the 173k estimate. The unemployment rate fell to 3.4%, while average hourly earnings rose 4.4%. The labor force participation rate was unchanged at 62.6% and the employment-population ratio was unchanged at 60.4%.

Overall, this report shows that the Fed’s tightening policy has yet to slow down the labor market much. That said, average hourly earnings and the CPI are trending downward.

Those hoping for the Fed to cut rates in response to the regional banking situation might be disappointed. Former Fed Governor Randy Krozner put it succinctly: The Fed won’t quit until the labor market quits.

The regional banks got slammed again yesterday, with PacWest down another 50% and Western Alliance down 38%. There was a piece in the Financial Times about Western Alliance supposedly exploring strategical alternatives, which the company denied. Given the strong liquidity of some of these banks, the rout in the regional banks seem to be overdone. The regional banks are up pre-market.

The Biden Administration is closely watching the situation in the regional banks looking for evidence of market manipulation by short-sellers. SEC Chairman Gary Gensler put out a statement saying: “As I’ve said, in times of increased volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly.”

Vital Statistics:

Happy Dave Brubeck Day. Stocks are lower this morning as regional bank fears continue to simmer. Bonds and MBS are up.

As expected, the FOMC hiked the Fed Funds rate by 25 basis points and signaled they are ready to pause. It removed language referring to further tightening of policy. During the press conference, Powell pushed back on the idea that the Fed was ready to cut rates. If you look strictly at the dual mandate, that makes sense. On a scale of 1-10, the labor market is at a 9.8, while inflation remains way too high. He acknowledged that it will take a while to get us down to 2% inflation, but emphasized the Fed isn’t willing to relax that target to something like 3%. FWIW, inflation averaged about 3% from 1985 – 2000 and I think most people would regard that time period as pretty comfortable economically.

The bond market was already strong due to the regional bank situation, with PacWest falling 50%, so there wasn’t much reaction to the new language on the long end, although the 2 year did rally on the announcement. The Fed Funds futures are now predicting the Fed will do nothing at the June meeting, and there is a 50-50 chance of a rate cut at the July meeting. The futures are not factoring in any more rate hikes, and they see 75 basis points of easing by the end of the year.

Nonfarm productivity fell 2.7% in the first quarter as output rose 0.2% and hours worked increased 3%. Compared to a year ago, productivity fell 0.9%. Unit labor costs rose 6.3%. Productivity is an inflation-killer, so this is bad news for the Fed.

The regional banks are getting slugged again today, with PacWest down another 40%, and First Horizon down big after its merger with TD bank is terminated. Western Alliance is down despite a press release that updated the markets on its deposit situation. Zions is down as well. If anything will push the Fed to cut rates, this is going to be the catalyst.

Job cuts in April fell 25% month-over-month to 66.995. They are still triple the number they were a year ago. Retail led, along with technology. Separately, initial jobless claims rose to 242k.

Mortgage applications decreased last week as purchases fell 2% and refis fell 1%. “Mortgage applications decreased last week, despite rates declining slightly for the first time in three weeks. The 30-year fixed rate decreased five basis points to 6.5 percent, which is still 114 basis points higher than a year ago,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Elevated rates continue to both impact homebuyer affordability and weaken demand for refinancing. Home purchase activity has been very sensitive to rates and local market trends, including the very low supply of existing-home inventory. However, newly constructed homes account for a growing share of inventory, giving more options for prospective buyers. The jumbo-conforming spread continues to narrow, an indication that there is reduced lender appetite for jumbo loans following the recent turmoil in the banking sector and heightened concerns about liquidity. The spread was 13 basis points last week, after being as wide as 64 basis points in November 2022.”