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Vital Statistics:
Stocks are lower this morning after Moody’s downgraded the US outlook from stable to negative after the market closed on Friday. Bonds and MBS are down small.
Moody’s downgraded their outlook for the US on Friday from “stable” to “negative,” citing the mounting debt and the rising cost of servicing that debt. “In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues,” the agency said. “Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability.”
The US will have to pass another stopgap measure once we hit the debt ceiling later this week. Given that bond prices are roughly where they were prior to the announcement, the markets appear to be taking this in stride.
The week ahead will have the Consumer Price Index on Tuesday, along with retail sales and housing starts. We will also get a lot of Fed-speak.
UBS is out with a call saying the Fed will cut the Fed Funds rate by 275 basis points next year. Morgan Stanley sees the first rate cut in June, while Goldman sees Q4.
Mortgage delinquencies increased in the third quarter, according to the MBA. “The national mortgage delinquency rate increased in the third quarter from the record survey low reached in the second quarter of this year, with an uptick in delinquencies across all loan types – conventional, FHA, and VA,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “The increase was driven entirely by a rise in earliest-stage delinquencies – those 30-days and 60-days past due. Later-stage delinquencies – those 90 days or more past due – declined to the lowest level since the first quarter of 2020. The decline in later-stage delinquencies, along with a foreclosure starts rate of 0.14 percent – which is well below the historical quarterly average of 0.40 percent – suggest that distressed homeowners may be utilizing available loss mitigation options that prevent a foreclosure start. Additionally, accumulated home equity may also be enabling some homeowners to sell their homes well before foreclosure becomes a possibility.”
The problems in commercial real estate are coming to a head as the problems in office expand to retail and multi-family. I discussed the state of play in my latest Substack post – please check it out and consider subscribing.
The Wall Street Journal had a story this morning (paywall) about the problems in mezzanine debt, which is like a second mortgage for commercial real estate properties. Foreclosures hit a record this year in the mezzanine space, which is often a canary in the coal mine. It looks like a lot of the creditors are not banks, but hedge funds and asset managers. But with asset prices in free fall, the banks will start to feel the heat.
The problems in commercial real estate might be one reason why the Fed will need to ease sooner rather than later.
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