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Morning Report: GDP surprises to the upside


Vital Statistics:

Stocks are lower this morning after disappointing earnings. Bonds and MBS are up small after the European Central Bank held rates steady.

Third quarter GDP rose at a 4.9% seasonally-adjusted annual pace, powered by strong consumer spending, which rose 4%. There was also a sizeable build in inventories which bumped up the investment portion. We all knew the third quarter was supposed to come in strong and it did. That said, other economic indicators like consumer sentiment, ISM surveys etc. don’t seem to confirm that sort of strength. Something seems odd in the numbers, though it is possible that increased defense spending is playing a part here. Or as Paul Krugman once quipped: Weaponized Keynsianism.

The PCE Price Index rose 2.9%, which is much lower than the numbers we have seen in the Personal Incomes and Outlays readings. Excluding food and energy, the PCE Price Index rose 2.4%. This should be good news for the bond market, although it could explain why the GDP report seems so out of step with the other indicators. If the government is underestimating inflation, it will overstate inflation-adjusted growth.

Separately, durable goods orders rose 4.7% while initial jobless claims rose slightly to 210,000.

RIthm Capital (aka New Rez) reported better than expected earnings this morning. Book Value per share rose 2.7% to $12.32 and earnings available for distribution was more than twice the quarterly dividend. Mortgage origination volume rose 12% QOQ and fell 19.5% YOY to $11.1 billion. The company is forecasting a dismal Q4, where volume is expected to fall to $7-9 billion, which is about the same as last year. Rithm expects mortgage origination to be challenging through 2024.

Mortgage REIT Annaly Capital reported earnings yesterday. Book Value per share fell 12% compared to Q2 as the environment was inhospitable for mortgage assets. “The third quarter of 2023 marked a challenging period for fixed income markets driven by a rapid rise in global yields. Agency MBS
spreads widened amidst ongoing supply, MBS runoff from Federal Reserve and bank portfolios as well as elevated volatility,” commented David Finkelstein, Annaly’s Chief Executive Officer and Chief Investment Officer. “While risks to the operating environment persist, we expect to benefit from attractive investment returns across our three businesses and a supportive financing environment. Within Agency MBS, historically wide spreads provide ample compensation for above average volatility and technical challenges. Meanwhile, our Residential Credit business continues to grow, bolstered by strong performance from our whole loan correspondent channel, and our MSR portfolio is strengthened by stable cash flows and rising yields supporting valuations.” Despite all the bad news, earnings available for distribution did cover the dividend, albeit barely. Annaly stock is down about 22.5% over the past 30 days.

Mortgage REIT AGNC Investment also announced that book value fell 14% from Q2 to a level of $8.08 per share. They will release full earnings next week on the 30th. AGNC’s book value declined more than Annaly’s presumably because they don’t have MSRs to rely on. But needless to say, interest rate volatility is killing MBS spreads and that is bad news for agency REITs like AGNC Investment. They did declare a $0.12 monthly dividend, making the company one of the few mREITs out there that hasn’t cut its dividend since the Fed started hiking rates. The stock has been annihilated over the past month, falling 27%. Assuming the dividend remains intact (a big if) the stock yields 19%.

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