The Daily Tearsheet

Vital Statistics:

	Last	Change
S&P futures	3,996	0.75
Oil (WTI)	77.00	0.34
10 year government bond yield		3.98%
30 year fixed rate mortgage		6.84%

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

Jerome Powell wrapped up a second day of testimony yesterday, and his prepared remarks were more or less the same as what he said on Tuesday in front of the Senate. After the markets took his remarks as a signal the Fed was planning to hike by 50 basis points in March, he added the comment that “I stress that no decision has been made on this” when referring to the Fed’s preparedness to increase the pace of rate hikes. Of course we will get the jobs report tomorrow, and the CPI next Tuesday which will determine what the Fed does in two weeks.

The Fed Funds futures see a 75% chance of a 50 basis point hike, although the 2 year yield has fallen this morning on some labor data that shows a potential softening in the data.

US employers announced 77,770 job cuts in February, according to outplacement firm Challenger, Gray and Christmas. This is down 24% from January, but multiples of last year’s number. Technology is the leader in job cuts. The YTD number is the highest since 2009. “Certainly, employers are paying attention to rate increase plans from the Fed. Many have been planning for a downturn for months, cutting costs elsewhere. If things continue to cool, layoffs are typically the last piece in company cost-cutting strategies,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc. “Right now, the overwhelming bulk of cuts are occurring in Technology. Retail and Financial are also cutting right now, as consumer spending matches economic conditions. In February, job cuts occurred in all 30 industries Challenger tracks,” he added.

Challenger and Gray basically compile a list of press releases and use that to come up with their numbers. So if Meta announces a bunch of job cuts, that gets counted, but if a small firm does a layoff without a press release that doesn’t factor into the numbers. So there is a big firm bias here.

Separately, Initial Jobless Claims rose to 211,000 last week.

Agile Trading, a fintech which facilitates MBS and TBA trading, just executed the first fully automated assignment of trade transaction. Agile’s platform helps mortgage lenders get better execution on hedges and introduces broker-dealers to a deep pool of TBA and MBS liquidity.

Loan Depot announced fourth quarter earnings yesterday. Since the company exited wholesale, the declines are rather dramatic. Funded volume in the fourth quarter came in at just under $7 billion, a decline of 43% compared to the third quarter and 80% on a year-over-year basis. Loan Depot is focusing on reducing expenses and targeting the first time homebuyer and diverse communities.

“Vision 2025 focuses on creating long-term shareholder value by creating an innovative, purpose-driven, and durable mortgage origination footprint focused on first-time homebuyers and serving diverse communities. We believe that a laser focus around putting first-time buyers into homes positions loanDepot to be a customer’s trusted resource when making key homeownership and other financial decisions. We also continued to centralize our operational functions and unified the leadership of our origination channels to sharpen our focus and accelerate the implementation of Vision 2025.

Vital Statistics:

	Last	Change
S&P futures	3,990	0.75
Oil (WTI)	77.28	-0.28
10 year government bond yield		3.97%
30 year fixed rate mortgage		6.78%

Stocks are flat as we await further Jerome Powell testimony. Bonds and MBS are flat.

Jerome Powell testified in front of the Senate yesterday and braced the markets for a 50 basis point hike in March. In his prepared remarks, Jerome Powell raised the possibility for a faster pace of tightening:

Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.

This puts a lot of weight on the Consumer Price Index next Tuesday. The reaction in the bond market was muted on the long end (the 10 year didn’t do much) but we saw the 2 year yield increase by 22 basis points to 5.09%. The 2s – 10s spread hit a negative 103 basis points, which is the most inverted yield curve since just before the 81-82 recession, which was a doozy.

The Fed Funds futures now see a 50 basis point hike at the March meeting:

Deutsche Bank strategist Jim Reid talked said that if history is any guide, yield curve inversions like this signal a recession is imminent: “Bear in mind that on all the previous occasions that the 2s10s has been more than -100bps inverted since data is available from the early 1940s (1969, 1979, 1980 and 1981) a recession has either been underway, or has occurred within a maximum of 8 months,” Reid said. “To highlight the rarity of such an occurrence, there have only been 7-month end closes lower than -100bps in 80 years of available data. So we are in rarefied air.”

As I discussed in my Substack piece over the weekend, a recession in the context of a strong labor market is entirely possible, and has happened in the past.

Speaking of the labor market, the ADP Employment Report said that the private sector added 242,000 jobs in February. The bad news for the bond market is that annual pay increased 7.2%. “There is a tradeoff in the labor market right now,” said Nela Richardson, chief economist, ADP. “We’re seeing robust hiring, which is good for the economy and workers, but pay growth is still quite elevated. The modest slowdown in pay increases, on its own, is unlikely to drive down inflation rapidly in the near term.”

The 242,000 increase is higher than the Street’s 220,000 forecast for Friday’s jobs report. The 7.2% wage increase is way higher than the 4.7% annual increase in average hourly earnings.

Mortgage applications increased 9% last week as purchases and refis rose the same amount. “Mortgage rates continued to increase last week. The 30-year fixed rate rose to 6.79 percent – the highest level since November 2022 and 270 basis points higher than a year ago,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Even with higher rates, there was an uptick in applications last week, but this was in comparison to two weeks of declines to very low levels, including a holiday week. Comparing the application indices from a year ago, purchase applications were still down 42 percent, and refinance activity was down 76 percent. Many borrowers are waiting on the sidelines for rates to come back down.”

On the heels of the FTC’s announcement of a lawsuit to block the ICE / Black Knight merger, the companies revised the terms of the deal and announced they have reached an agreement to sell Empower to Constellation Software, a Canadian firm. Constellation is kind of a Berskhire Hathaway of IT solutions – a decentralized collection of disparate providers of mission-critical software. The company has a market cap of $35 billion, so it can be considered a real buyer.

The deal was re-cut to lower the number of ICE shares issued. The spread is still gargantuan at 24% gross (the new deal is worth roughly $75 a share and Black Knight is trading at $60.69) which indicates the deal still has an antitrust problem and the divestiture won’t satisfy the regulators. As part of the deal, ICE has agreed to litigate with the FTC to get the deal done.

Supposedly ICE’s asking price for Empower is something like $400 million. I think ICE paid $11 billion for Ellie Mae’s which is mainly Encompass so this gives you an idea of how far valuations of mortgage assets have fallen over the past couple years.

Vital Statistics:

	Last	Change
S&P futures	4,058	6.75
Oil (WTI)	79.98	-0.40
10 year government bond yield		3.94%
30 year fixed rate mortgage		6.73%

Stocks are marginally higher as we await Jerome Powell’s Humphrey-Hawkins testimony. Bonds and MBS are down.

Jerome Powell heads to the Hill this morning at 10:00 am. I don’t see the prepared remarks on the Fed’s website quite yet, so we don’t have a preview. The market’s focus will be on whether Powell still sees the “disinflationary process” continuing in the face of strong inflation numbers in January.

It will be interesting to see how much push-back Powell gets from Congress over rising rates. Republicans will probably beat him up for missing the turn in inflation while Democrats will hammer him for wanting a weaker labor market.

The Federal Trade Commission is set to sue to block the merger between Black Knight and Intercontinental Exchange. The two companies would need to divest either Encompass or Empower to get past the regulators. The problem is that the regulators probably won’t accept a spin-out into a separate company. They will have to find a strong buyer who will be able to compete with the newly merged company, and there probably aren’t many players in the industry who would be able to make it work. The merger spread is ginormous right now, so the market thinks this deal is deader than Elvis.

For-sale inventory declined in January, according to the Black Knight Mortgage Monitor. The company reported that home prices fell 0.13% MOM on a seasonally-adjusted basis, which is the smallest decline since it started about 7 months ago. Half of all mortgages are at rates of 3.5% or lower, while 2/3 are below 4%. We have a long way to go in rates before refinance activity returns, although cash-out refinances will come into play if rates fall further.

“The interplay between inventory, home prices and interest rates has been the defining characteristic of the housing market for the last two years, and this continues to be the case,” said Walden. “Today, we see buyer demand dampened under pressure from rising rates and their impact on affordability, with purchase rate-lock volumes cooling in late February. However, when rates ticked down closer to 6% early in the month, we saw a rebound of buyside demand. On the other side of the equation, we’ve seen a consistent theme of potential sellers – many with first-lien rates a full 3 percentage points below today’s offerings – pulling back from putting their homes on the market. In fact, January marked the fourth consecutive monthly decline in overall for-sale inventory according to our Collateral Analytics data, with the primary driver being a 25-month stretch of new listing volumes running below pre-pandemic averages. While demand remains weak, faltering supply has resulted in months of available inventory stagnating near 3.1 in recent months.

“Sharply rising 30-year rates in February have weakened home affordability, with nearly all major U.S. markets remaining unaffordable as compared to their own long-run averages. With 30-year rates at 6.5% in late February, it took 33.2% of the median household income to make the monthly principal and interest payments on the average home purchase. That’s up from January’s 32.4% and significantly above the 30-year average of ~24%, but still 3.5 percentage points below the 37% level reached in October 2022 when affordability hit a more than 35-year low. Between escalating inventory challenges and worsening affordability, we’re seeing some volatility in the market – just not in the form of widespread, steep price corrections.”

Congress is looking at a tax credit to incentivize builders to renovate homes in blighted areas. In many areas, the cost to renovate is more than the price the property could fetch on the market, so nothing happens. “We must continue to make it more attractive to invest in the communities that need it most,” Mr. Cardin said in a written statement. Mr. Young said the bill would help restore communities by directing private capital to low-income neighborhoods,” bridging the gap between the cost of renovation and neighborhood property values.” The bill hopes to see 500,000 new homes added to inventory.

Vital Statistics:

	Last	Change
S&P futures	4,050	0.50
Oil (WTI)	78.48	-1.20
10 year government bond yield		3.91%
30 year fixed rate mortgage		6.77%

Stocks are flat this morning on no real news. Bonds and MBS are up. It looks like the bond rally is due to fears of weakness in Europe and Treasuries are just correlating with overseas markets.

The week ahead should be relatively eventful with Jerome Powell heading to the Hill for his Humphrey-Hawkins testimony. We will also get the jobs report on Friday. It will be interesting to see whether Powell starts to get some static from lawmakers on overshooting. My guess is that Congress will probably leave him alone as long as the labor market is strong.

I compared the economy of today versus the late 1960s, and I think the similarities are pretty striking. The big question is whether you can have a recession when the labor market is super-strong. The answer may surprise you. It also gives us a template for this year and next.

This article is on my substack: The Weekly Tearsheet. It is meant as a companion to this blog where I do deeper dives into some of the weekly data or other things going on in the markets. I hope you like it and consider subscribing.

The March Fed Funds futures are now handicapping a 30% chance of a 50 basis point hike. The CME has introduced the 2024 futures as well, which see a December 2024 Fed Funds rate of 4.00% – 4.25% as the most likely outcome next year.

The homebuilders are under pressure this morning as J.P. Morgan downgraded KB Home and D.R. Horton based on valuation. It wasn’t all glum however as Meritage was upgraded to Overweight from neutral.

The homebuilders are the classic early-stage cyclical. The timing isn’t right yet – we have to wait for rate cuts – but we are getting close.

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Vital Statistics:

	Last	Change
S&P futures	3,997	12.50
Oil (WTI)	77.46	-0.70
10 year government bond yield		3.99%
30 year fixed rate mortgage		6.81%

Stocks are higher this morning despite more hawkish talk from central bankers. Bonds and MBS are flat.

The services economy expanded in February. “Business Survey Committee respondents indicated that they are mostly positive about business conditions. Suppliers continue to improve their capacity and logistics, as evidenced by faster deliveries. The employment picture has improved for some industries, despite the tight labor market. Several industries reported continued downsizing.”

The supplier deliveries index hit the fastest level since 2009, indicating that supply chain issues are mainly in the rear view mirror. The prices index declined, however it is still elevated. One respondent in IT said: “The current dynamics in the marketplace are such that it is getting harder to reduce costs. Most industries are being pinched by inflation and more expensive labor markets. Before, cost reduction was the goal; it’s now cost avoidance. That said, since we’re not able to reduce cost to maintain margins, we have to reduce the employee base more aggressively to achieve margins.”

Fed Governor Christopher Waller sounded hawkish in remarks yesterday: “I would be very pleased if the data we receive on inflation and the labor market this month show signs of moderation,” Fed governor Christopher Waller said in remarks posted on the Fed’s website. “But wishful thinking is not a substitute for hard evidence in the form of economic data. After seeing promising signs of progress, we cannot risk a revival of inflation.”

Nonfarm productivity rose 1.7% in the fourth quarter, according to BLS. This is a big downward revision from the initial 3% estimate. Output was revised downward while hours worked was revised upward. This is generally bad news for inflation, however we are talking about data that is getting pretty far in the past so I doubt it will influence the Fed all that much.

Unit labor costs rose 3.2%, which was driven by a 4.9% increase in compensation and a 1.7% increase in productivity. Manufacturing sector productivity declined 2.7%.

Fannie Mae updated its guidance on appraisals. The use of third-party data and models may now be used in some circumstances in lieu of an on-site appraisal. Fannie is changing the language from “appraisal waiver” to “value acceptance.” This should be good news for companies like Clear Capital who use technology to conduct valuations. DU will implement these changes on April 15.

UWM Corp (the parent of United Wholesale) reported fourth quarter numbers. Originations came in at $25.1 billion in the fourth quarter versus $33.5 billion in the third quarter and $55.2 billion a year ago. Gain on sale margins were more or less flat with Q3 at 51 bps.

The guidance for Q1 is for volume to come in between $16 and $23 billion, with gain on sale between 75 and 100 bps. This should translate into higher production revenue despite the drop in volume.

The Street sees Q1 earnings at breakeven and full year 2023 EPS at $0.20. Not sure how they continue to pay the $0.10 quarterly dividend. The stock yields 9.4%.

If you compare UWM’s numbers to Rocket’s it shows the vulnerability of Rocket’s model in a purchase environment. Rocket’s volumes were down much more dramatically, which shows it can dominate in a refi environment. Brokers, who are much closer to real estate agents, tend to capture more of the purchase business. You will ask your realtor for a lender recommendation in general. It will be interesting to see of Rocket’s ancillary services like Rocket Money will be able to capture some of that purchase business.

Vital Statistics:

	Last	Change
S&P futures	3,967	-7.00
Oil (WTI)	76.52	-0.53
10 year government bond yield		3.96%
30 year fixed rate mortgage		6.68%

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

The manufacturing economy improved in February, however it has contracted for the third consecutive month. New Orders and production contracted. Unfortunately, prices increased again which will concern the Fed. This will probably mean that February CPI and PPI reports will be disappointing.

“The U.S. manufacturing sector again contracted, with the Manufacturing PMI^® improving marginally over the previous month. With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the February composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year. New order rates remain sluggish due to buyer and supplier disagreements regarding price levels and delivery lead times; the index increase suggests progress in February. Panelists’ companies continue to attempt to maintain head-count levels through the projected slow first half of the year in preparation for a stronger performance in the second half.”

Rocket reported an 82% drop YOY drop in revenues during the fourth quarter of 2022. Origination volumes fell 75% YOY to $19 billion. Gain on sale margins also contracted to 2.17% from 2.8%. Unexpectedly high demand for the company’s promotional home purchase product was a driver of the lower margins.

“Last year marked a period of transformation for Rocket. We right-sized our business to respond to a challenging market; we also made key investments to serve our clients better on every step of their home ownership journey,” said Jay Farner, CEO of Rocket Companies. “With foundational pieces of our client engagement program in place, we are focused on expanding our top of funnel, lifting conversion and lowering our client acquisition cost, with the ultimate goal of growing our purchase market share and extending client lifetime value.”

Mortgage applications fell 5.7% last week as purchases fell 6% and refis fell 3%. The uptick in bond yields over the past few weeks drove the decrease. “The 30-year fixed rate increased to 6.71 percent last week, the highest rate since November 2022, which drove a 6 percent drop in applications. After a brief revival in application activity in January when mortgage rates dropped to 6.2 percent, there has now been three straight weeks of declines in applications as mortgage rates have jumped 50 basis points over the past month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which continues to put upward pressure on rates. Both purchase and refinance applications declined last week, with purchase index at a 28-year low for a second consecutive week. Purchase applications were 44 percent lower than a year ago, as homebuyers again retreat to the sidelines as higher rates crimp affordability. Refinance applications account for less than a third of all applications and remained more than 70 percent behind last year’s pace, as a majority of homeowners are already locked into lower rates.”  

The yield curve continues to invert, with the 10s-2s spread at -89 basis points. The last time we were at these levels was during the Volcker tightening regime during the early 1980s.

Construction spending fell 0.1% MOM and rose 5.7% YOY, according to the Census Bureau. Private residential construction fell 0.6% MOM and 3.9% YOY. There is a big divergence between multifamily, which is up 20.6% YOY and single-family which fell 18.4%. That said, single family construction is 3x the value of multi-family.

Vital Statistics:

	Last	Change
S&P futures	3,992	4.00
Oil (WTI)	75.55	1.83
10 year government bond yield		3.96%
30 year fixed rate mortgage		6.66%

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

Consumer confidence declined in February, according to the Conference Board.

“While consumers’ view of current business conditions worsened in February, the Present Situation Index still ticked up slightly based on a more favorable view of the availability of jobs. In fact, the proportion of consumers saying jobs are ‘plentiful’ climbed to 52.0 percent—back to levels seen in the spring of last year. However, the outlook appears considerably more pessimistic when looking ahead. Expectations for where jobs, incomes, and business conditions are headed over the next six months all fell sharply in February.”

“And, while 12-month inflation expectations improved—falling to 6.3 percent from 6.7 percent last month—consumers may be showing early signs of pulling back spending in the face of high prices and rising interest rates. Fewer consumers are planning to purchase homes or autos and they also appear to be scaling back plans to buy major appliances. Vacation intentions also declined in February.”

Home prices fell 0.1% in December, according to the FHFA House Price Index. For the year, home prices rose 8.4%. “House price appreciation continued to wane in the fourth quarter” said Dr. Polkovnichenko, Supervisory Economist in FHFA’s Division of Research and Statistics. “House prices grew at a much slower pace in recent quarters amid higher mortgage rates and a decline in mortgage applications. These negative pressures were partially offset by historically low inventory.”

You can see a pretty wide skew in the regions. The top performing regions during the pandemic (West Coast and Mountain states) are bringing up the rear, while Florida and the Southeast are the leaders.

The Case-Shiller Home Price Index showed a bigger slowdown in December, with the index falling 0.8%

“The cooling in home prices that began in June 2022 continued through year end, as December marked the sixth consecutive month of declines for our National Composite Index,” says Craig J. Lazzara, Managing Director at S&P DJI.  “The National Composite declined by -0.8% in December, and now stands 4.4% below its June peak.  For 2022 as a whole, the National Composite rose by 5.8%, the 15^th best performance in our 35-year history, although obviously well below 2021’s record-setting 18.9% gain.  We could record similar observations in the 10- and 20-City Composites.”

“Prices fell in all 20 cities in December, with a median decline of -1.1%.  Moreover, for all 20 cities, year-over-year gains in December (median 4.4%) were lower than those of November (median 6.4%). We noted last month that home prices in San Francisco had fallen on a year-over-year basis.  San Francisco’s decline worsened in December (-4.2% year-over-year); its west coast neighbors Seattle (-1.8%) and Portland (+1.1%) once again form the bottom of the league table.

“The prospect of stable, or higher, interest rates means that mortgage financing remains a headwind for home prices, while economic weakness, including the possibility of a recession, may also constrain potential buyers. Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken.”

Homebuilder Hovnanaian Enterprises reported a 8.8% decline in revenues and a drop in gross margins, which indicates that it had to use promotional incentives to move the merchandise. The cancellation rate rose to 30%.

“High inflation, sharp year-over-year increases in mortgage rates and significant economic uncertainty adversely impacted consumer demand for housing during the second half of 2022,” stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer. “We are encouraged that the improving tone of the housing market is a good indication that the housing industry is positioned to experience a strong spring selling season. We believe long term fundamentals such as strong employment levels, pent up housing demand from the substantial underproduction of new homes for more than a decade and historically low levels of existing home supply set the stage for a housing market rebound. However, we continue to closely monitor the impact of mortgage rate movements and the actions taken by the Federal Reserve have on housing demand,” concluded Mr. Hovnanian.

Hovnanian is exiting the Minnesota, North Carolina, Tampa and Chicago markets.

Vital Statistics:

	Last	Change
S&P futures	3,998	23.00
Oil (WTI)	76.22	-0.23
10 year government bond yield		3.93%
30 year fixed rate mortgage		6.70%

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

The upcoming week will have a lot of data, although it probably won’t be all that market-moving. We will get the ISM data, home prices and productivity. The jobs report will be next Friday, not this one. We will also get earnings from Rocket and United Wholesale.

Pending Home Sales rose 8.1% MOM, but are still down 24% compared to a year ago. That said, NAR doesn’t really see much of a pickup in home sales until 2024. “Buyers responded to better affordability from falling mortgage rates in December and January,” said NAR Chief Economist Lawrence Yun. “Home sales activity looks to be bottoming out in the first quarter of this year, before incremental improvements will occur,” Yun said. “But an annual gain in home sales will not occur until 2024. Meanwhile, home prices will be steady in most parts of the country with a minor change in the national median home price.”

Durable goods orders fell 4.5% in January, according to the Census Bureau. Excluding transportation, durable goods orders rose 0.7%. Core Capital Goods orders (a proxy for corporate capital expenditures) rose 0.8%.

A record 25% of home searchers on Redfin are looking to relocate. Miami is the most popular destination from relocators. While prices have soared in many parts of Florida, they are still way cheaper than the MSAs these people are leaving, especially Coastal California and New York.

“A lot of buyers have flocked  into coastal Florida from out of town over the last several months,” said Elena Fleck, a Redfin agent in Palm Beach, which is part of the larger Miami metro area. “Buyers moving in from places like New York and San Francisco are helping the local market recover from last fall’s housing downturn. They’re not nearly as fazed by high mortgage rates because homes here are so much less expensive than their hometowns, and they get larger lots, pools, nice weather and lower taxes.”

Lending Club announced earnings. Mortgage revenue was down over 50% compared to a year ago and profit fell 52%. Home equity products accounted for more revenue than traditional mortgage purchase and refis.

Vital Statistics:

	Last	Change
S&P futures	3,976	-40.00
Oil (WTI)	75.68	0.23
10 year government bond yield		3.94%
30 year fixed rate mortgage		6.63%

Stocks are lower this morning after another lousy inflation number. Bonds and MBS are down.

Personal Incomes rose 0.6% in January, which was below the 1% street estimate. Personal Consumption Expenditures were robust however, rising 1.8% versus the 1.2% consensus estimate. The increase in consumption was driven by motor vehicles and food services.

The PCE Price Index (the Fed’s preferred inflation measure) rose 0.6%, and the core index (minus food and energy rose the same amount). The Street was looking for 0.4% on both of these, so it another miss. It was also the highest reading since June of 2022. You can see CPI and PCE in the graph below.

So, the CPI, PPI and PCE inflation numbers all rebounded in January. The good news is that consumption remained strong, as did the labor market, so the chance of a hard landing seems remote.

The March Fed Funds futures are now handicapping a 1-in-3 chance for a 50 basis point hike at the March meeting. Note that we will not get the February PCE numbers until after the March meeting, but we will get another look at CPI / PPI.

New Home Sales rose 7.4% MOM to a seasonally-adjusted annual rate of 670,000. This is still down 19% on a year-over-year basis. The median home price was flat on a year-over-year basis to $427,500. The average price fell 5.3% on a YOY basis.

The personal income and outlay number above were confirmed by the University of Michigan Consumer Sentiment Survey. Consumer sentiment rebounded strongly in January, both on a month-over-month basis and an annual basis.

“Consumer sentiment confirmed the preliminary February reading, rising a modest 3% above January. After lifting for the third consecutive month, sentiment is now 17 index points above the all-time low from June 2022 but remains almost 20 points below its historical average. Consumers with larger stock holdings exhibited particularly large increases in sentiment. Overall, February’s reading was supported by a 12% improvement in the short-run economic outlook, while all other index components were essentially unchanged.”

In more bad inflation news, inflationary expectations increased from 3.9% to 4.1%, although longer-term expectations remained at 2.9%. Regardless, January has been awful month for the Fed and its battle against inflation.

Vital Statistics:

	Last	Change
S&P futures	4,023	23.50
Oil (WTI)	74.93	0.98
10 year government bond yield		3.97%
30 year fixed rate mortgage		6.64%

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

Fourth quarter GDP rose 2.7%, in the second revision. Third quarter growth was revised upward to 3.2%. Growth was driven primarily by inventory growth. Services spending rose, driven by housing and health care. Government spending was revised upward as well. Personal consumption expenditures were revised downward from 2% to 1.4%.

The PCE price index was also revised upward by 0.5% to 3.7%. Excluding food and energy, the index rose 0.4% to 4.3%. Needless to say, not good news on the inflation front, however we are talking about data that was far in the past at this point.

The FOMC minutes shed some further light on the comments from Loretta Mester and James Bullard last week. On the decision whether to raise 25 basis points or 50 basis points, they said:

Against this backdrop, and in consideration of the lags with which monetary policy affects economic activity and inflation, almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting. Many of these participants observed that a further slowing in the pace of rate increases would better allow them to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability as they determine the extent of future policy tightening
that will be required to attain a stance that is sufficiently restrictive to achieve these goals. A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount. The participants favoring a 50 basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way.

We knew that Mester and Bullard were in the 50 basis point camp, and “a few” implies one more. The Committee noted that we had some welcome inflation prints, but more evidence of stabilization would be needed.

In other economic news, initial jobless claims came in at 192,000 (anything under 200k is exceptional) and the Chicago Fed National Activity index reversed to a positive number, primarily driven by strong employment and consumption data.

The total value of US residential real estate fell by 4.9% (or about $2.3 trillion) from its June peak, according to data from Redfin. “The housing market has shed some of its value, but most homeowners will still reap big rewards from the pandemic housing boom,” said Redfin Economics Research Lead Chen Zhao. “The total value of U.S. homes remains roughly $13 trillion higher than it was in February 2020, the month before the coronavirus was declared a pandemic.”

The Bay Area saw the brunt of the selling. New York City, Seattle and Boise also saw decreases. The suburbs held up better than the cities themselves.

Here is the official notice for the FHA mortgage insurance reduction.

More pain in the commercial real estate sector (particularly office buildings): Columbia Property Trust (owned by PIMCO) defaulted on $1.8 billion in mortgage notes on office buildings in New York City, Boston, and San Francisco. We are also seeing defaults on mortgages for shopping malls. The commercial real estate sector’s pain is being driven by rising short term rates (anyone who has floating rates is feeling the pain) and also a sea-change in office work. Note that S.L. Green keeps hitting new occupancy lows.

The problems in commercial real estate has the potential to impact residential, at least the non-QM sector.

Wells Fargo laid off hundreds of mortgage bankers this week. “We announced in January strategic plans to create a more focused home-lending business,” she said. “As part of these efforts, we have made displacements across our home-lending business in alignment with this strategy and in response to significant decreases in mortgage volume.”