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Morning Report: Mixed bag of reports on the services economy


Vital Statistics:

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

Mortgage applications fell 5% as purchases and refis fell by the same amount. “Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates. Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed mortgage rate decreased to 7.21 percent last week, but rates remained more than a full percentage point higher than a year ago, despite mixed data on the health of the economy and signs of a cooling job market. The refinance index dropped to its lowest level since January 2023, driven by a 6 percent decline in conventional refinances.”

Widening MBS spreads aren’t helping things, as the difference between the 30 year fixed rate and the 10 year (which is a decent enough proxy for MBS spreads) is sitting at close to record levels. The chart below goes back to 1990. Know what sticks out to me? The era of QE. Did QE make that big of a difference in MBS spreads? It is debatable. So if QE didn’t affect things all that much than why would people fret so much about QT?

It looks like there is a mean reversion element to MBS spreads, which means this too shall pass.

The services economy slowed sharply in August according to the S&P Services PMI. The index fell from 52.5 to 50.5, which means the services economy is more or less static. Note the manufacturing economy has been in contraction for almost a year.

“The survey data send a hint of rising stagflation risks, as stubborn price pressures are accompanied by a near-stalling of business activity. The PMI numbers for the third quarter so far point to a faltering of economic growth after a robust second quarter, as a renewed manufacturing downturn is accompanied by a deteriorating picture in the service sector.”

The ISM Services PMI paints a brighter picture, showing the services economy expanded in August. New orders, employment, and activity all increased. That said, we saw a big jump in inventories and a big decrease in backlog, which suggests slower growth ahead. Pricing pressures increased again based on higher energy and transportation costs.

Student loan repayments are about to resume, and that should have a negative impact on services.

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