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Vital Statistics:
Stocks are flat this morning as retailer earnings come in. Bonds and MBS are up.
Industrial production fell 0.6% in October, according to the Federal Reserve. Manufacturing production fell 0.7%. Capacity Utilization fell to 78.9% which is well below its long-term average. This confirms the readings we have been getting out of the ISM surveys – manufacturing is struggling. Separately, the employment market seems to be weakening as initial jobless claims rose to 231k last week.
Hot on the heels of cautious guidance out of Home Depot and Target, Wal Mart sounds the alarm on consumer spending. The CFO said in an interview on CNBC that Wal Mart has been “leaning heavily into promotions,” which should be taken to mean “cutting prices to move the merchandise.” “Our events have been strong,” he said. We’ve been pleased with those. Halloween was good overall. But in the in the last couple of weeks of October, there were certainly some trends in the business that made us pause and kind of rethink the health of the consumer.” Comp sales were strong at 4.9%, but if the consumer is struggling you should expect to see better results out of the discounters and the dollar stores.
There is lots of talk about a soft landing (Google it), and certainly most everyone will prefer that to a hard landing. That said, it is usually a negative sign.
Now lets look at how much the Fed Funds rate increased before these mentions: 1995: 345 basis points, 2000:285 basis points, 2006: 440 basis points, 2018: 243 basis points, 2023: 525 basis points. I know a soft landing is the base case for the government and the big investment banks, but it feels like drawing into an inside straight right now.
What does that mean for rates? They should be going down, but the US has a lot of debt maturing over the next year that needs to be rolled over. And China isn’t buying:
The third quarter was tough for independent mortgage banks according to research from the MBA. Independent mortgage banks lost an average of $1,015 per loan, an increase from the $534 loss in the second quarter. “Net production income has been in the red for six consecutive quarters. MBA forecasts lower industry volume over the next two quarters compared to last quarter, which means a turnaround is unlikely until the second quarter of 2024. One silver lining is that mortgage servicing continues to be a bright spot for many companies. Combining both the production and servicing business lines, roughly half of mortgage companies stayed profitable in the third quarter of 2023. Were it not for mortgage servicing, only about one in three companies would have been profitable.”
Homebuilder sentiment fell in November as rising interest rates dampened affordability.
“The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Moreover, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory. While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market.”
“While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months,” said NAHB Chief Economist Robert Dietz. “In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%. Given the lack of existing home inventory, somewhat lower mortgage rates will price-in housing demand and likely set the stage for improved builder views of market conditions in December.”
Mortgage credit availability improved in October, according to the MBA. “Mortgage credit availability rose in October, but the growth was driven by increased activity in the jumbo market. The jumbo index increased by 2.7 percent to the highest level in 14 months – its third straight monthly increase. However, despite the uptick in credit availability recently, we are still close to the lowest levels since 2013. Loan offerings remain narrower as lenders have reduced capacity to cope with the lower origination volumes,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Some lenders responded to the challenging rate environment and offered more ARM products, as mortgage rates increased by over 40 basis points on average in October, reaching almost 8 percent in the second half of the month.”
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