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Morning Report: GDP surprises to the upside


Vital Statistics:

Stocks are higher this morning on Meta earnings. Bonds and MBS are down.

As expected, the Fed hiked the Fed Funds rate by 25 basis points yesterday. The statement itself was relatively anodyne – investors hoping for a signal the Fed is done with rate hikes were disappointed. During the press conference, the business press probed over whether this was the last rate hike, and Powell remained steadfast in his data-determinant viewpoint. The Fed Funds futures see a 22% chance of another hike in September and a 30% chance of another 25 by the end of the year. They see the first rate cut in March of 24.

Separately, the ECB hiked by 25 bp this morning.

Gross domestic product rose 2.4% in the second quarter, according to the BEA. This was way higher than expectations – the Street was looking for 1.5%. Consumption and corporate spending were the big additions to GDP while residential construction was a drag.

Inventory build was a big driver in the GDP number. After the supply chain issues of the pandemic, inventories were drawn down and GDP growth was supported by businesses rebuilding inventory. It looks like we are back at pre-pandemic levels, if you look at inventory versus sales. This tailwind looks played out.

The best news in the report was the continued downward pressure on prices. The PCE Price Index increased 2.6% compared to 4.1% in the first quarter. Excluding food and energy, the PCE Price Index rose 3.8% compared to 4.9% in the first quarter.

New York Community Bank reported earnings that beat the street this morning. The company continues to digest Signature. The company didn’t give a lot of info on the mortgage business, however gain on sale fell and the company reported a 154% increase in multi-fam delinquencies. I am not sure if this is all Signature, but single-fam DQs were more or less flat.

Tri-Pointe Homes reported earnings this morning. The builders are benefiting from a scarcity of existing homes for sale. This is due to the lock-in effect, where potential sellers are staying put because of sticker shock on new mortgage rates, aka “hate the house but love the mortgage.” This is pushing buyers towards new construction. The press release said that new homes are currently 33% of inventory compared to 13%, which is the historical norm. They also mentioned that “consumers have adjusted to mid-six to low-seven percent interest rates, setting a new normal in the market.”

Pending Home Sales rose modestly in May, according to NAR. “The recovery has not taken place, but the housing recession is over,” said NAR Chief Economist Lawrence Yun, “The presence of multiple offers implies that housing demand is not being satisfied due to lack of supply. Homebuilders are ramping up production and hiring workers…With consumer price inflation calming close to the Federal Reserve’s desired conditions, mortgage rates look to have topped out…Given the ongoing job additions, any meaningful decline in mortgage rates could lead to a rush of buyers later in the year and into the next.”

NAR sees the mortgage rate averaging 6.4% this year and falling to 6% in 2024.

Thursday: GDP, Unemployment Claims, Durable Goods, Pending Home Sales

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