Morning Report: Fed Day

Vital Statistics:

S&P futures4,1789.25
Oil (WTI)106.94.59
10 year government bond yield 2.99%
30 year fixed rate mortgage 5.52%

Stocks are higher this morning as we await the FOMC decision. Bonds and MBS are flat.

The FOMC decision is due at 2:00 pm, so be careful locking around then. TBA bid / ask spreads are a little narrower today, but the market is skittish about the Fed’s plans for its holdings of mortgage backed securities.

The economy added 247,000 jobs in April, according to the ADP Employment Report. Small businesses lost 120,000 jobs while large businesses gained 321,000 jobs. ADP attributed the skew to the inability of small businesses to compete with big business for workers. Leisure and hospitality added the most employees, but education / health and professional / business services increased as well.

The Street is looking for 400,000 new jobs in Friday’s jobs report, so this was a bit of a miss. This report was the lowest reading over the past year. The report says this is due to the tight labor market and the shortage of workers overall. The demand is there, but the supply is not.

Mortgage Applications increased 2.5% last week as purchases rose 4% and refinances rose 0.2%. “Treasury yields eased slightly last week but remained close to 2018 highs, as financial markets await the news from the Federal Reserve on its latest plans for rate hikes and reducing its balance sheet holdings,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications increased for conventional, FHA, and VA loans and were up 4 percent overall,” he said. “This is potentially a good sign for the spring home buying season, which has seen a slow start thus far. The purchase market remains challenged by low levels of housing inventory and rapid home-price gains, as well as the affordability hit from higher mortgage rates that are forcing prospective buyers to factor in higher monthly payments.”

New Rez reported better-than-expected earnings for the first quarter, driven by a markup of its servicing portfolio. Book value per share rose 10%, which was a bright spot compared to some of the mortgage REITs like Annaly and AGNC Investment, which saw mid-teen % declines in book value per share.

The services economy expanded in April, but is decelerating according to the ISM Services Index. “The Prices Index reached an all-time high of 84.6 percent, up 0.8 percentage point from the March figure of 83.8 percent and surpassing the previous record of 83.9 percent in December 2021. Services businesses are continuing to replenish inventories, as the Inventories Index expanded for a third straight month; the reading of 52.3 percent is up 0.6 percentage point from March’s figure of 51.7 percent. The Inventory Sentiment Index (46.7 percent, up 6.5 percentage points from March’s reading of 40.2 percent) contracted in April for the second consecutive month, indicating that inventories are in ‘too low’ territory and insufficient for current business requirements.”

Morning Report: Affordability takes a hit

Vital Statistics:

S&P futures4,1554.25
Oil (WTI)103.72-1.59
10 year government bond yield 2.93%
30 year fixed rate mortgage 5.49%

Stocks are marginally higher as we begin the two-day FOMC meeting. Bonds and MBS are up.

Job openings hit a series high, according to the JOLTs report. The quits rate rose to 3%. Quits are important because they are a good predicter of future wage growth. Quits jumped in construction, reflecting the dire shortage of workers in this area. Overall, this report gives the Fed the comfort to raise rates, which is what they are going to do tomorrow.

Home prices rose 22% YOY in April, according to the Clear Capital Home Data Index. On a quarterly basis, home prices rose 6%, which means that we are seeing an acceleration in home price appreciation. Some of the usual suspects like San Jose saw a 10.7% increase. The South and the West Coast were the leaders, however even the Midwest and Northeast saw improving conditions.

Rising home prices and mortgage rates have taken a bite out of affordability. The percentage of median income that a mortgage payment taken out on the median home has jumped to about 26% from 20% late in 2020. While this is a huge leap compared to recent history, it is about average going back to the early 1980s. In fact, during the 81-82 recession, when mortgage rates were in the high teens, the P&I payment accounted for 50% of the median income.

Separately, CoreLogic reported that home prices rose 21% in March, although it forecasts that home price appreciation will slow to 6% over the next year. “The annual growth in the U.S. index was the largest we have measured in the 45-year history of the CoreLogic Home Price Index,” said Dr. Frank Nothaft, chief economist at CoreLogic. “Couple that price increase with the rapid rise in mortgage rates and buyer affordability has fallen sharply. In April, 30-year fixed mortgage rates averaged nearly 2 percentage points higher than one year earlier. With the growth in home prices, that means the monthly principal and interest payment to buy the median-priced home was up about 50% in April compared with last April.”

Redfin noted the same thing, saying that the typical borrower’s monthly payment has increased 39% YOY. “Rising mortgage rates are taking a bite out of pending sales as both buyers and sellers take a step back from the turbulent market,” said Redfin Chief Economist Daryl Fairweather. “It seems as though the ratio of buyers to sellers remains mostly the same, which is why we have yet to see a substantial drop in bidding wars or the share of homes selling quickly. It’s still early days though when it comes to 5% mortgage rates. The number of buyers willing to pay such high mortgage payments could evaporate by late summer.”

Morning Report: Manufacturing remains strong

Vital Statistics:

S&P futures4,126-0.25
Oil (WTI)101.32-3.39
10 year government bond yield 2.98%
30 year fixed rate mortgage 5.42%

Stocks are flat this morning as we head into a big week of data. Bonds and MBS are down.

The FOMC is meeting this week, and the market is looking for a 50 basis point increase in the Fed Funds rate. There won’t be any new projections, although balance sheet reduction is one of the big issues going forward.

In terms of economic data, we will get ISM numbers this week, along with the jobs report on Friday. We are also in the heart of earnings season, with a couple thousand earnings reports coming.

The Street is looking for 400,000 jobs to have been created in April, a 3.6% unemployment rate, and 5.5% wage growth.

Institutional investors in the rental space are getting static from government and consumer groups. The complaint is that first time homebuyers are getting priced out of the market by investors. Is that true? Investors bought something like 80,300 houses in the fourth quarter, which is a drop in the bucket compared to the 6.5 million existing and new home sales we generally get in a year. It doesn’t seem like that sort of incremental buying is moving up house prices.

The usual suspects are writing letters asking the institutions to explain why they are raising rents, and have been accused of “running a scam.” They are going after Invitation Homes, American Homes 4 Rent and Progress Residential. Rents are rising because home prices are rising. Shortages of workers and materials are delaying homebuilding, along with regulation which adds to the price of a new home.

Manufacturing decelerated in April, according to the ISM Manufacturing Index. Sentiment is still strong, but shortages remain an issue. Of note is the idea that inflation may be moderating:

“The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment. In April, progress slowed in solving labor shortage problems at all tiers of the supply chain. Panelists reported higher rates of quits compared to previous months, with fewer panelists reporting improvement in meeting head-count targets. April saw a slight easing of prices expansion, but instability in global energy markets continues. Surcharge increase activity across all industry sectors continues. Panel sentiment remained strongly optimistic regarding demand, though the three positive growth comments for every cautious comment was down from March’s ratio of 6-to-1, Panelists continue to note supply chain and pricing issues as their biggest concerns.”

You can see that the ISM is still pretty strong over the longer-term, however it is heading down as inflation and bottlenecks remain an issue:

Construction spending rose 0.1% MOM and 11.7% YOY, according to Census. This was a touch below expectations. Residential construction rose 1% MOM and 18% YOY.

Morning Report: Inflation comes in at 6.6%.

Vital Statistics:

S&P futures4,233-44.25
Oil (WTI)106.721.39
10 year government bond yield 2.89%
30 year fixed rate mortgage 5.36%

Stocks are lower this morning after disappointing earnings from tech leaders Amazon and Apple. Bonds and MBS are down.

Personal income rose 0.5% in March, according to the Bureau of Economic Analysis. February was revised upward from 0.5% to 0.7% as well. The Personal Consumption Expenditures Index (the Fed’s preferred measure of inflation) rose 0.9% in March, which was a big acceleration from February which rose 0.5%. This was driven primarily by increases in food and energy which increased due to the situation in Ukraine.

The core PCE price index rose 0.3% which was flat with February’s numbers. On an annual basis, the PCE price index rose 6.6%. Ex-food and energy it rose 5.2%. Personal Consumption Expenditures rose 1.1% and the savings rate fell.

Overall this report shows that incomes are expanding, which is good for the economy, however the increase in inflation will keep the Fed in a defensive role. This report also seems to contradict the first quarter’s initial read on GDP, which seems out of step with most of the other data out there. I suspect GDP will be revised upward in future releases.

Employment costs rose 1.4% in the first quarter as wages rose 1.2% and benefits increased 1.8%. On a year-over-year basis 4.5% as wages rose 4.7% and benefits increased 4.1%.

Annaly Capital (one of the biggest mortgage REITs out there) reported first quarter earnings. Book value per share fell a whopping 15% as MBS spreads widened, which was offset by increases in the value of the servicing book.

“The market environment during the first quarter of 2022 was one of the most challenging for fixed-income in decades, characterized by exceptional volatility with substantial spread widening and a notable increase in benchmark rates,” remarked David Finkelstein, Annaly’s Chief Executive Officer and President. “While our portfolio continued to generate strong earnings, our book value was not immune to the effects of Agency MBS underperformance resulting from market turbulence.”

Investors like Annaly are the ultimate buyers of the mortgage banking production. They are wary about the Fed’s impending balance sheet reduction and are therefore unlikely to aggressively bid mortgage backed securities. This flows through to TBA prices and finally through to the rates mortgage bankers can offer borrowers.

Mortgage backed securities are driven primarily by two factors: the level of overall interest rates in the market, and the volatility of interest rates in the market. Volatility is a key driver, since mortgage backed securities exhibit what bond geeks call negative convexity. This is because of prepayment risk. The takeaway should be that if Treasuries settle down and find a level, then we should see an improvement in MBS spreads, which will help push down borrowing rates.

Consumer sentiment improved in April, according to the University of Michigan Consumer Sentiment Survey. While sentiment is better than it was in March, we are still well below levels from a year ago. Even if you look at a longer-term chart, you can see that the mood of consumers is quite dour.

The downward slide in confidence represents the impact of uncertainty, which began with the pandemic and was reinforced by cross-currents, including the negative impact of inflation and higher interest rates, and the positive impact of a persistently strong labor market and rising wages. The global economy has added even more uncertainties about prospects for the U.S. economy, including the growing involvement in the military support for Ukraine, and renewed supply line disruptions from the covid crisis in China. Who would not be apprehensive about future conditions, even if on balance they anticipated a continued expansion? 

Morning Report: GDP falls in Q1

Vital Statistics:

S&P futures4,21837.25
Oil (WTI)101.82-0.09
10 year government bond yield 2.85%
30 year fixed rate mortgage 5.32%

Stocks are higher this morning despite an awful GDP print. Bonds and MBS are flat.

GDP fell 1.4% in the first quarter, according to the Bureau of Economic Analysis. This was well below the Street consensus, which predicted a gain of 1.1%. Personal Consumption Expenditures rose 2.5%, which again was below the Street consensus of a 3.4% increase.

Decreased private inventory investment and declining government spending (i.e. the expiration of COVID-related stimulus and assistance programs) subtracted from growth, while increases in consumption and construction helped increase GDP. Imports rose, which again is a negative factor.

The decline in inventory investment was driven primarily by autos, which can be volatile although a chip shortage is impacting low inventory levels. The increase in personal spending was driven by healthcare and was offset by decreased spending on goods.

Overall, this report seems out of step with what the Atlanta Fed’s GDP Now index was predicting. I suspect the muted reaction in the markets (interest rates didn’t move) is driven by expectations that the number will be revised upward in coming reports.

That said, even if GDP gets revised positively, the combination of stagnating growth and high inflation puts the Fed in a pickle. If unemployment starts ticking upward, it might be time to dust off the misery index.

Separately, initial jobless claims fell to 180,000 last week. These are still incredibly low numbers, which indicates the weakness we are seeing in the GDP numbers aren’t filtering through to the labor market.

Profits on the median-priced single family home declined in the first quarter of 2022 from 51.6% to 47.2%, according to data from ATTOM. This is still much higher than historical averages, however it might indicate that the housing market is beginning to cool off.

“Home prices simply can’t continue to go up as rapidly as they have for the past few years,” said Rick Sharga, executive vice president of market intelligence for ATTOM. “The combination of higher prices, rising mortgage rates and the highest rates of inflation in 40 years may be pricing some prospective buyers out of the market, which means we may begin to see lower sales numbers. Ultimately, as affordability worsens, price appreciation should slow down, and we may even see modest price corrections in some markets.”

The report said that the typical home seller had owned the property for only 5.7 years which was down from 6.8 years a year ago.

The first time homebuyer is being sidelined by rising mortgage rates. The 200 basis point increase in mortgage rates makes a big impact on affordability. At the end of 2021, the median home price was $346,900 and the average mortgage rate was about 3%. For a typical mortgage with 20% down, the principal and interest payment works out to be about $1,170. At 5%, that payment jumps to $1,490. Big increase.

“Prospective homebuyers have pulled back this spring, as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices. The recent decrease in purchase applications is an indication of potential weakness in home sales in the coming months,” said MBA associate vice president Joel Kan in a Wednesday statement. 

Morning Report: Refinance Index hits lows of early 2018

Vital Statistics:

S&P futures4,18010.25
Oil (WTI)100.22-1.49
10 year government bond yield 2.75%
30 year fixed rate mortgage 5.30%

Stocks are higher this morning as some big tech companies report earnings. Bonds and MBS are flat.

Mortgage Applications fell 8.3% last week as purchases fell 8% and refinances fell 9%. “With mortgage rates increasing last week to the highest level since 2009, applications continued to decline,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Overall application activity fell to the lowest level since 2018, with both purchase and refinance applications posting declines. Refinance applications were 70 percent below the same week a year ago, when the 30-year fixed rate was in the 3-percent range.”

The average mortgage rate rose from 5.2% to 5.37%. The refinance share of mortgage activity fell to 35%. The MBA refinance index is back to early 2018 levels.

Chart: MBA refinance index:

Pending Home Sales fell again in March, according to NAR. This is the fifth monthly decline in a row. “The falling contract signings are implying that multiple offers will soon dissipate and be replaced by much calmer and normalized market conditions,” said Lawrence Yun, NAR’s chief economist. “As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity. The aspiration to purchase a home remains, but the financial capacity has become a major limiting factor.”

The Senate has confirmed Lael Brainard as the vice-chair of the Fed.

Morning Report: New home sales fall again.

Vital Statistics:

S&P futures4,265-27.25
Oil (WTI)100.061.49
10 year government bond yield 2.75%
30 year fixed rate mortgage 5.34%

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are up.

Durable Goods Orders rebounded 0.8% in March. Ex-transportation they rose 1.1%. Core Capital Goods (a proxy for business capital investment) rose 1%.

Home prices rose 2.1% MOM and 19.4% YOY, according to the FHFA House Price Index. “House prices rose to set a new historical record in February,” said Will Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “Acceleration approached twice the monthly rate as seen a year ago. Housing prices continue to rise owing in part to supply constraints.” Home price appreciation is definitely accelerating.

Separately, the Case-Shiller Index rose 20.2% YOY. Note that Case-Shiller is a more broad-based index than FHFA, which only looks at homes which are backed by a GSE / government loan. This excludes jumbos, all-cash sales and non-QM.

Notable MSAs include Phoenix (up 33%), Tampa (up 33%) and Miami (up 30%). “The macroeconomic environment is evolving rapidly and may not support extraordinary home price growth for much longer,” wrote Craig Lazzara, managing director at S&P DJI, in a release. “The post-Covid resumption of general economic activity has stoked inflation, and the Federal Reserve has begun to increase interest rates in response. We may soon begin to see the impact of increasing mortgage rates on home prices.” The median mortgage payment on the median house with a 30 year fixed rate loan is 46% higher (or $550), according to research from This is cooling demand as we hit the main part of the spring selling season.

New home sales fell 12.6% YOY to a seasonally-adjusted annual pace of 763,000 units, according to the Census Bureau. The median home price rose 21% to $436,700. Shortages of materials and labor make it difficult for builders to focus on starter homes, so they are spending more effort on the luxury sector. After spiking in the early days of the pandemic, new home sales have been on the weak side. Aside from the aftermath of the bubble and the COVID spike, we are at 1997 levels in building.

Consumer confidence decreased in April, according to the Conference Board. “Consumer confidence fell slightly in April, after a modest increase in March,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index declined, but remains quite high, suggesting the economy continued to expand in early Q2. Expectations, while still weak, did not deteriorate further amid high prices, especially at the gas pump, and the war in Ukraine. Vacation intentions cooled but intentions to buy big-ticket items like automobiles and many appliances rose somewhat.”

It is important to note that expectations have been on the decline since early 2021 while the present situation index has been improving. The big question involves consumers’ expectations of their financial situation. If they think inflation will be worse in 6 months, they may accelerate purchases in order to beat the price increases. This would worsen inflation. Conversely if they think the economy is going to weaken, they will defer purchases, which will lower inflation and take some pressure off the Fed. The survey doesn’t ask why consumers feel how they feel, so we’ll have to see how it plays out.

Morning Report: Janet Yellen thinks inflation may have peaked

Vital Statistics:

S&P futures4,247-20.25
Oil (WTI)97.31-4.79
10 year government bond yield 2.82%
30 year fixed rate mortgage 5.41%

Stocks are lower this morning after Chinese stocks were down 5% in the overnight session. Bonds and MBS are up.

The upcoming week is full of data, with home price indices on Tuesday, GDP on Thursday, and personal incomes / spending on Friday. There is no Fed-speak as we are in the quiet period ahead of the May FOMC meeting next week.

The Fed Funds futures are locked in on a 50 basis point hike next week:

Mortgage delinquencies hit a record low in March, according to Black Knight Financial. The national delinquency rate fell to 2.84%, which beat the previous record of 3.22% in early 2020. A strong employment market, combined with continued student loan deferrals, along with super-low interest rates have helped borrowers keep their heads above water.

The Chicago Fed National Activity Index dropped in March as employment-related indicators made less of a positive impact. Overall, the economy is still growing well above the historical trend, and is territory usually reserved for economic booms.

Despite the rise in home prices, noted that median listing prices are falling in a few MSAs, particularly in the Rust Belt. “Many of the metro areas seeing median list price declines have seen an [influx] of smaller homes come to market, which carry lower price tags,” says George Ratiu, manager of economic research for “At the same time, several of the cities have unemployment rates, which, while still historically low, are above the national level. [This indicates] that buyers may face steeper affordability challenges from rising mortgage rates.”

It is important to note that is using a median listing price, which is different than the repeat-sales price that home price indices like Case-Shiller or Clear Capital use. So this isn’t really indicative that home prices, which have been rising at a double digit pace have suddenly hit the wall and are beginning to decline.’s observations reflect a change in product mix. That said, affordability has taken a big hit over the past year as higher mortgage rates and more expensive housing are conspiring to make life difficult for the first time homebuyer.

Janet Yellen says that inflation may have peaked, and she doesn’t see a recession. Investors are beginning to buy Treasuries, as they bet the sell-off has gone too far, too fast and the economy is poised to slow. “We have been incrementally adding longer-duration bonds into our portfolios in anticipation of market participants pricing in slower growth moving forward,” said Gavin Stephens, director of portfolio management at Goelzer Investment Management.

It looks like Twitter and Musk are about to agree to a friendly deal at his original bid of $54.20 per share. It doesn’t contain a no-shop provision, so a process has yet to be run.

Morning Report: James Bullard sees unemployment falling below 3%.

Vital Statistics:

S&P futures4,377-29.25
Oil (WTI)105.31-2.59
10 year government bond yield 2.92%
30 year fixed rate mortgage 5.27%

Stocks are lower this morning as bond yields continue to rise. Bonds and MBS are down.

St. Louis Fed President James Bullard made some hawkish comments yesterday, saying he would like to see the Fed Funds rate at 3.5% by the end of the year. He also said that unemployment should fall below 3% (!). “What we need to do right now is get expeditiously to neutral and then go from there.” Given that inflation rates are much higher than interest rates, monetary policy is still incredibly loose. Real (i.e. inflation-adjusted) interest rates are highly negative.

The last time the unemployment rate was below 3% was in the early 1950s.

Where were interest rates during the early 1950s? The 3 month T-bill was between 1.5% and 2% for the most part, and high quality corporate debt was yielding about 3%. The inflation rate in 1952 was 1.92%. So real interest rates were about 0%, give or take.

Housing starts came in at a seasonally-adjusted annual rate of 1.79 million in March, which was higher than expected. This is up 4% on a YOY basis. Building Permits rose to a 1.87 million pace.

Despite the increase in housing starts, homebuilder confidence continues to sag. The NAHB / Wells Fargo Housing Market Index, which measures homebuilder sentiment fell for the fourth month in a row. “The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” said NAHB Chief Economist Robert Dietz. Interestingly, the Northeast (which has been the laggard in the US housing market over the past 15 years) rose while everywhere else fell.

Morning Report: New home purchase applications fall.

Vital Statistics:

S&P futures4,379-8.25
Oil (WTI)108.311.59
10 year government bond yield 2.83%
30 year fixed rate mortgage 5.27%

Stocks are flattish this morning as financials report earnings. Bonds and MBS are up small.

The upcoming week has a lot of housing data, with the NAHB Housing market index, housing starts, and existing home sales. We will also get leading economic indicators. The focus will be earnings.

Mortgage applications for new home purchases fell 5% YOY, according to the MBA Builder Application Survey. “Mortgage applications for new home purchases increased in March, which is consistent with typical seasonal trends and a sign of strong underlying demand for housing,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Potential buyers have increasingly looked to new homes as an option, given the lack of existing homes for sale. The average loan size continued to set record highs and reached $436,151. Growth in applications for larger loans continued to dominate application activity.”

Shortages of materials and labor continue to bedevil home builders. The lead times to get things like garage doors are measured in months. This is slowing the pipeline for new homes, and also helps explain the skew towards more expensive homes. The starter homes are rising in price due to general inflation, and rising mortgage rates are making the payment unaffordable for most first-time homebuyers. Builders will probably compensate by developing more attached townhome style properties instead of single family detached homes.

With a shortage of homes overall, remodeling is an alternative for someone who might be in the market for a move-up property. The NAHB remodeling index was flat YOY and way higher than it was pre-pandemic.

Mortgage origination fell at Wells Fargo during Q1. Volumes were down 27% YOY and revenues fell 33% as lower gain on sale margins were partially offset by rising servicing income.