Author: Brent Nyitray

Vital Statistics:

Stocks are higher this morning as we head into Fed Week. Bonds and MBS are flat.

The week ahead will have two major reports, with the Consumer Price Index tomorrow, and the FOMC meeting on Wednesday.

The Fed funds futures see a 77% chance of a 50 basis point hike and a 23% chance of a 75 basis point hike. Given some of the language from different Fed speakers, we could see a pretty wide range for the 2023 Fed Funds forecast in the dot plot.

Purchase locks fell 22% in November, according to Black Knight. Overall lock volumes fell 21.5% and are down 68.5% compared to a year ago. A combination of the normal seasonal slowdown and affordability issues are making a perfect storm for mortgage bankers. “Mortgage rates pulled back slightly in November based on what the market perceived as good inflation news,” said Scott Happ, president of Optimal Blue, a division of Black Knight. “The spread between mortgage rates and the 10-year Treasury yield narrowed by 13 basis points during the month to 283 basis points in a sign that investors and lenders may be seeking to accelerate the impact of falling rates. But, despite the improvement in rates, lock activity remained subdued.”

Homebuyer demand ticked up slightly as lower rates are beginning to get some potential buyers interested. “This week has been relatively calm and quiet as we approach the end of one of the most volatile years in housing history,” said Redfin Deputy Chief Economist Taylor Marr. “But it’s not over yet. Next Tuesday’s inflation report is the 500-pound gorilla in the room, and the Fed’s press conference the next day will bring us much more clarity on how soon and how quickly we can expect mortgage rates to come down in the new year. Since we expect only a small decline in prices next year, mortgage rates will dictate housing affordability, and as a result, demand and sales, in 2023. If rates continue declining, more buyers may wade back into the market, as they’ll have lower monthly payments.” 

Good read from CNBC reporter Ron Insana on what ails the economy. In his opinion, the US economy suffers from a shortages all over the place, particularly in the labor market. The Fed’s prescription is to increase the unemployment rate to 5% in order to bring the supply and demand imbalance more in line. Will that make the economy stronger? The answer is probably no. He recommends that we ease immigration rules to let in more people to fill the supply gap in the labor market.

It is an interesting prescription. The US has encouraged college at the expense of skilled labor for the past few decades, and now it seems we have a glut of over-educated and indebted people with few tangible skills, and a deficit of people who can weld, wire an electrical panel or swing a hammer. Increasing immigration will do wonders for the latter, but I don’t know what it will do for the former.

Vital Statistics:

Stocks are lower after the Producer Price Index came in hotter than expected. Bonds and MBS are down.

Inflation at the wholesale level picked up in November, according to the BLS. The Producer Price index rose 0.3% MOM and 7.3% YOY, which was driven primarily by final demand servicers, which is basically wages. The PPI ex-food and energy rose 0.3% MOM and 6.2% YOY. This report is one of the last pieces of data before the Fed meets next week.

Consumer sentiment improved in the early part of December, according to the University of Michigan Consumer Sentiment Index. All three components improved on a MOM basis, but are still lower than a year ago. This probably reflects falling gasoline prices – these consumer confidence indices generally correlate negatively with gas prices.

Inflationary expectations eased again, which is good news for the Fed. Inflation expectations hit a 15 month low, but are still higher than a couple of years ago.

Home equity increased 15.8% YOY in the third quarter, according to data from CoreLogic. This works out to be about a $34,300 gain on the average mortgaged home. Negative equity is still an issue in the Midwest and Northeast.

“At 43.6%, the average U.S. loan-to-value (LTV) ratio is only slightly higher than in the past two quarters and still significantly lower than the 71.3% LTV seen moving into the Great Recession in the first quarter of 2010. Therefore, today’s homeowners are in a much better position to weather the current housing slowdown and a potential recession than they were 12 years ago. Weakening housing demand and the resulting decline in home prices since the spring’s peak reduced annual home equity gains and pushed an additional number of properties underwater in the third quarter. Nevertheless, while these negative impacts are concentrated in Western states such as California, homeowners with a mortgage there still average more than $580,000 in home equity.”

Vital Statistics:

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

Third quarter productivity was revised upward from 0.3% to 0.8%, according to the BLS. This was due to a revised 0.5% increase in output and a 0.1% increase in hours worked. Unit labor costs were revised downward from 3.5% to 2.4%. They are up 5.3% over the past four quarters.

Mortgage applications fell 2% last week as purchases fell 3% and refis rose 5%. Refis are still 86% lower than they were last year at this time. “Mortgage applications decreased 2 percent compared to the Thanksgiving holiday-adjusted results from the previous week, even as mortgage rates continued to trend lower,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “Rates decreased for most loan products, with the 30-year fixed declining 8 basis points to 6.41 percent after reaching 7.16 percent in October. The 30-year fixed rate was 73 basis points lower than a month ago – but was still more than three percentage points higher than in December 2021. Additionally, the pace of refinancing remained around 80 percent lower than a year ago.”

Home prices rose 10% in October, according to CoreLogic. This is half the pace of late spring / early summer.

“Following the recent mortgage rate surge above 7%, real estate activity and consumer sentiment regarding the housing market took a nosedive,” said Selma Hepp, interim lead of the Office of the Chief Economist at CoreLogic. “Home price growth continued to approach single digits in October, and it will move in that direction for the rest of the year and into 2023. However,” Hepp continued, “while some housing markets have seen significant recalibration since the spring price peak and are likely to post losses in 2023, further deteriorating for-sale inventory, some relief in mortgage rate increases and relatively positive economic news may help eventually stabilize home prices.” CoreLogic sees home prices rising about 4% next year, although some of the hottest MSAs during COVID will probably see significant declines.

The decline in home prices will take some of the pressure off the inflation numbers, since housing is a key component to the inflation numbers. Rental inflation is coming down, and is probably past the peak, at least according to some market observers.

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

Home prices fell 2.4% QOQ in November, according to the Clear Capital Home Data Index. It is interesting to see places like the Midwest and Northeast lead while the hottest markets on the West Coast are taking a beating. Take a look at some of the declines below:

You might see YOY declines in places like San Francisco soon. Affordability constraints actually do matter at some point.

Falling home prices have exhumed a demon from the past – negative equity. According to Black Knight, 8% of mortgaged home purchases from 2022 are now underwater. Overall negative equity numbers remain low, however.

Among FHA mortgages originated this year, over 25% are underwater, and 75% have less than 10% equity. According to Black Knight, we are seeing an increase in FHA early payment defaults. A combination of falling home prices and a possible 2023 recession will make servicing GNMA loans a nightmare.

Given affordability problems, home prices should be falling pretty dramatically, but they haven’t at least so far. Blame low inventory for that.

“We’ve now seen four consecutive months of home price pullbacks at the national level,” said Graboske. “But after a couple of significant drops earlier in the summer, the pace of cooling has slowed considerably, with October’s non-seasonally adjusted drop of just 0.43% the smallest decline yet. Though seemingly counterintuitive, the much higher rate environment may be limiting the pace of price corrections due to its dampening effect on inventory inflow and subsequent gridlock in home sale activity. While the median home price is now 3.2% off its June peak – down 1.5% on a seasonally adjusted basis – in a world of interest rates 6.5% and higher, affordability remains perilously close to a 35-year low. Add in the effects of typical seasonality and one might expect a far steeper correction in prices than we have endured so far, but the never-ending inventory shortage has served to counterbalance these other factors. Indeed, the volume of new for-sale listings in October was 19% below the 2017-2019 pre-pandemic average. This marks the largest deficit in six years outside of March and April 2020 when much of the country was in lockdown – with the overall market still more than half a million listings short of what we’d consider ‘normal’ by historical measures.

Falling home prices are affecting builders as well. In November, 36% of builders cut prices to move inventory, and 56% were offering some sort of incentive.

We are also seeing other promotional activity, including offers to pay closing costs, rate buydowns, or free upgrades.

A Reuters poll shows analysts expect home prices to fall about 12% peak-to-trough. Prices peaked in June, and have already fallen about 4% so far this year. The MSAs that had the fastest growth will probably experience the biggest declines, as we are seeing in the Clear Capital data above.

Vital Statistics:

Stocks are lower as markets continue to digest Friday’s jobs report. The strong wage growth number was a subject of discussion over the weekend in the business press. Bonds and MBS are down.

The upcoming week should be relatively uneventful as we have little economic data and the Fed is in the quiet period ahead of next week’s FOMC meeting. We will get productivity and unit labor costs on Wednesday, but that is the second revision for the third quarter and probably too far in the past to matter much for monetary policy. We will get the University of Michigan Consumer Sentiment number on Friday, which will include inflationary expectations.

The services economy improved in November, according to the ISM Services Index. The Business Activity component increased by 9 points, which is bullish for the economy. Supply chain issues continue to abate. Prices continue to be firm, although the number of firms reporting increased prices did decrease slightly.

While the manufacturing economy seems to be in contraction, the services economy is getting better. I suspect that the US dollar’s strength is playing a part, and as the Fed wraps up its tightening regime the dollar will weaken.

Dr. Cowbell argued over the weekend that the Fed’s inflation target should be 3%, not the 2%. FWIW, in the 1980s and 1990s, inflation was much higher than the 2% target, and I think most people remember that as a pretty comfortable period economically.

Vital Statistics:

Stocks are lower this morning after the jobs report came in better than expected. Bonds and MBS are down.

The economy added 263,000 jobs in November, which was better than the 200,000 street estimate. The unemployment rate stayed steady at 3.7%. Wage inflation continues to increase, with average hourly earnings rising 0.6%, faster than the upward-revised 0.5% in October. The labor force participation rate and the employment-population ratio both declined 0.1%.

To tie this into what Powell was saying Wednesday at Brookings, the biggest component of core inflation – services ex-housing – is driven by wage inflation. The other two – goods and housing services – are less of an issue going forward. Services ex-housing is the result of an extraordinarily tight labor market, and the Fed would like to see the supply / demand imbalance in the labor market get more in balance.

There are two ways to do that. The first way is for the Fed to cool the economy with rate hikes, causing a recession and lowering the demand for workers. The other way is for workers who left during COVID to return. The latter method is preferable since it will fix the imbalance naturally. Unfortunately, the Fed doesn’t have any way to influence that. The long-COVID sufferer who decides to re-enter the labor force isn’t going to care what the Fed Funds rate is.

The imbalance in the labor force is perplexing. The most likely outcome is that it stems from two areas – a decline in immigration and an increase in early retirements. The latter one might be a long-COVID effect. Assuming long COVID isn’t a permanent state of affairs, the labor force participation rate should be ticking up over time.

The Fed Funds futures ticked slightly more hawkish on the jobs report, but we are still looking at a consensus of 50 basis points. The only other major report would be the CPI coming in on the morning the Fed begins their meeting.

Stocks and bonds sold off on the employment number. The stock market reaction seems odd, but we may be in a “good news is bad news” environment for stocks which are fearing further rate hikes. The bond market’s reaction makes more sense. The yield curve is heavily inverted, back towards levels not seen since the early 1980s. The yield curve is typically positively slopes, which means it usually costs more to borrow for 10 years than it does for 2 years. There is a mean-reversion element too, which means you could think of the spread as a rubber band, and the further you get from normalcy, the greater the tension. In other words, with the two year being driven primarily by the Fed Funds projection and the 10 year being driven by market sentiment, further declines in long term rates will be more difficult to come by, and will be more fleeting.

The Atlanta Fed trimmed their GDP Now estimate to 2.8% from 4.3% in their latest model run. The ISM Manufacturing Survey, which has been in contraction mode for months, simply wasn’t comporting with a 4.3% expected GDP growth estimate.

Regardless, mortgage rates have been falling and are now back at levels last seen in mid-September.

Given my rubber band analogy they will want to be pulled higher, so the market is letting you back in.

Vital Statistics:

Stocks are higher after welcome news on spending and inflation. Bonds and MBS are flat after yesterday’s furious rally.

Jerome Powell signaled that the Fed would be ready to begin slowing the pace of rate hikes as early as December. That was taken as blaring signal that the Fed was going to hike 50 basis points instead of 75 basis points. The December Fed Funds futures now handicap an 80% chance of a 50 bp hike and a 20% chance of a 75 bp hike.

While the market had been leaning towards a 50 basis point hike to begin with, this caused a massive rally in the 10 year, especially towards the close. Some of this might have been month-end rebalancing however the 10 year bond yield dropped about 12 basis points in 15 minutes and the S&P 500 ended up about 125 points on the day.

He characterized the housing market during the pandemic years as a bubble, which was strange to my ears. I would say the housing market in some MSAs got over heated, but the bubble mentality wasn’t there as far as lenders, regulators etc. are concerned. Still it signals the Fed sees weaker home prices going forward.

Personal incomes rose 0.7% in October, which was better than expectations. Spending continues to remain robust, rising 0.8% MOM. The PCE Price Index, which is the Fed’s preferred measure of inflation came in lower than expectations. The core rate decelerated substantially on a MOM basis while the headline number stayed steady.

Powell talked about the three components of core inflation in his speech yesterday – core goods, housing services, and core services ex-housing. Core goods has been a supply chain issue, and that has improved a lot. Housing services are essentially rent and house prices, and that has been a big driver over the past year, however there is evidence this is subsiding. Finally core services ex-housing has been fluctuating, but this will be driven by the labor market and wage increases. Powell said that the Fed’s inflation forecasts envision housing being a driver of inflation through mid year 2023.

The manufacturing economy contracted for the first time since May of 2020, according to the ISM Manufacturing Survey. New Orders and exports are in contraction territory, while inventory is about where it should be. Prices are falling, which is good news on the inflation front.

“Manufacturing contracted in November after expanding for 29 straight months. Panelists’ companies continue to judiciously manage hiring, other than October 2022, the month-over-month supplier delivery performance was the best since February 2012, when it registered 47 percent and material lead times declined approximately 9 percent from the prior month, approximately 18 percent over the last four months. Managing head counts and total supply chain inventories remain primary goals. Order backlogs, prices and now lead times are declining rapidly, which should bring buyers and sellers back to the table to refill order books based on 2023 business plans.”

Construction spending fell 0.3% MOM in October, according to the Census Bureau. Residential construction declined, while public construction increased.

Vital Statistics:

Stocks are marginally higher as we await Jerome Powell’s speech at the Brookings Institution. Bonds and MBS are down.

Fed Chairman Jerome Powell will speak at the Brookings Institution at 1:30 PM. I don’t see any prepared remarks on the Fed’s website. He will address the labor market, inflation and monetary policy. This will be the last week of Fed-speak ahead of the December FOMC meeting December 13-14.

The consensus seems to be that he will talk about slow and steady increases in rates and does not want to spook the markets one way or the other.

St. Louis Fed President James Bullard published an article that suggested the Fed Funds rate needs to rise to at least 4.9% in order to begin to impact inflation. “Results based on the latest trimmed mean PCE inflation rate, which is for September, suggested that it would take a policy rate of at least 4.9% to exert downward pressure on inflation. Thus, even under generous assumptions, the policy rate has not yet reached a level that could be considered sufficiently restrictive, according to these calculations.”

Third quarter GDP rose 2.9% in the third quarter, an upward revision from the initial 2.6% estimate. The PCE inflation indicator was revised up 0.1% to 4.3%. Exports, consumption and government spending were revised upward. Residential construction continues to remain a drag.

The economy added 127,000 jobs in November, according to estimates from ADP. The Street is looking for 200,000 jobs in Friday’s Employment Situation report. “Turning points can be hard to capture in the labor market, but our data suggest that Federal Reserve tightening is having an impact on job creation and pay gains,” said Nela Richardson, chief economist, ADP. “In addition, companies are no longer in hyper-replacement mode. Fewer people are quitting and the post-pandemic recovery is stabilizing.”

Leisure and hospitality added 224,000 jobs while manufacturing lose 100,000. The median pay change for job-stayers was 7.6%, while the median pay change for job-changers was 15.1%.

Job openings edged down by 350k to 10.3 million, according to the JOLTS jobs report. The quits rate declined to 2.6% from 2.7%. This means that more people are staying with their employers, which will act to reduce wage inflation.

Pending home sales fell 4.6% in October, according to the National Association of Realtors. “October was a difficult month for home buyers as they faced 20-year-high mortgage rates,” said NAR Chief Economist Lawrence Yun. “The West region, in particular, suffered from the combination of high interest rates and expensive home prices. Only the Midwest squeaked out a gain. The upcoming months should see a return of buyers, as mortgage rates appear to have already peaked and have been coming down since mid-November.”

Mortgage Applications fell 0.8% last week as purchases increased 4% and refis fell 13%. “Mortgage rates declined again last week, following bond yields lower,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “The economy here and abroad is weakening, which should lead to slower inflation and allow the Fed to slow the pace of rate hikes. Purchase activity increased slightly after adjusting for the Thanksgiving holiday, but the decline in rates was still not enough to bring back refinance activity.” The MBA refinance index is at 22 year lows.

Vital Statistics:

Stocks are flattish after Chinese stocks rally overnight. Bonds and MBS are down.

Home prices rose 0.1% QOQ and 12.4% YOY, according to the FHFA House Price Index.

This means that the new conforming loan limit for 2023 will be $726,200. It looks like FHFA released the new limits a day early. “House prices were flat for the third quarter but continued to remain above levels from a year ago.” said William Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “The rate of U.S. house price growth has substantially decelerated. This deceleration is widespread with about one-third of all states and metropolitan statistical areas registering annual growth below 10 percent.”

The growth in the West is slowing, while the Southeast (especially Florida) is accelerating.

Separately, the Case Shiller Home price Index showed prices declined overall about 1.5% in September.

Redfin noted that home price growth is cooling the fastest in the Pandemic Boomtowns of Austin, Phoenix and Boise. “The forces slowing the housing market, such as high mortgage rates, are having an outsized impact on places like Austin and Boise that saw home prices skyrocket over the last few years,” said Redfin Senior Economist Sheharyar Bokhari. “Home prices can only rise by double digits for so long before the growth becomes unsustainable. High rates and stumbling tech stocks are making it unsustainable quite quickly, especially in destinations popular with tech workers. Plus, many of the out-of-towners with big budgets who wanted to move into those places already have.”

Vital Statistics:

Stocks are lower this morning on Chinese protests over COVID lockdowns. Bonds and MBS are up.

We have a big week of data coming up with house prices on Tuesday, GDP on Wednesday, Personal Incomes and Outlays on Thursday and the jobs report on Friday.

The FHFA House Price Index will be released on Tuesday. This will be the final number to establish the conforming loan limits for 2023. As of now, the consensus seems to be that the new limit will be 715k or so.

The PCE Price Index (the Fed’s preferred inflation index) will be released on Wednesday. We will also get one more CPI print before the Fed announces its decision for December.

Single family rents rose 10.2% YOY, according to CoreLogic. “Annual single-family rent growth decelerated for the fifth consecutive month in September but remained at more than twice the pre-pandemic growth rate,” said Molly Boesel, principal economist at CoreLogic. “High mortgage interest rates may be causing potential homebuyers to hit pause and remain renters, keeping pressure on rent prices.  However, the monthly rent change was negative in September, resuming the typical seasonal pattern for the first time since 2019, which could signal the beginning of rent price growth normalization.”

Interestingly, the lag between home price appreciation and rents is about 21 months, which means that we are looking at home price appreciation from early 2021. In theory, we should see an acceleration of rental inflation as the home price growth of 2021 and 2022 is still not reflected in the numbers yet.

The big banks are largely forecasting a recession for next year and a Fed Funds rate of 5%+

Most strategists think the S&P 500 will end 2023 lower than where it is today.