Friday - April 19, 2024

UMBS opened pretty much flat - down 2 bps.  S&P futured down 7.25 pts, on tension between Israel and Iran.

Existing Home Sales fell 4.3% in March to a seasonally adjusted annual rate of 4.19 million. This is down 3.7% on a year-over-year basis.  On the bright side, inventory is increasing, rising 14.4% YOY to 1.11 million units. The median home price rose 4.8% YOY to $393,500. The first time homebuyer accounted for 32% of sales compared to 26% in February and 28% a year ago. Investors purchased 15%, down from 21% in February and 17% in March.

The Index of Leading Indicators fell 0.3% in March after rising 0.2% in February. Over the past 6 months, the index has contracted 2.2%. The LEI’s six-month and annual growth rates remain negative, but the pace of contraction has slowed. Overall, the Index points to a fragile—even if not recessionary—outlook for the U.S. economy. Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024.

Homebuilder D.R. Horton reported a 24% increase in earnings per share for its second quarter. Homebuilding revenue rose 13% and gross margins expanded to 23% compared to 21% a year ago. The homebuilding business seems to be hitting on all cylinders: the company earned $1.2 billion in the quarter, and ROE was 22.2%.

Oddly, the company spent $450 million buying back its own stock. When the underlying business is that good, why aren't they plowing that capital back into the business? Return on inventory is 30%.

Western Alliance reported earnings of $1.60 a share, which was up 20% compared to Q4 and 25% from a year ago. Book Value per share rose 13.8% YOY to $47.30. Charge-offs ticked up to $9.8 million, which was about .08% of average loans. Net interest margins contracted.

The overnight session began with a very clear flight to safety in stocks (sell) and bonds (buy) on headlines regarding increased hostilities between Iran and Israel.  There have been plenty of "increased hostility" headlines this week that have not had much impact.  These were different because the initial newswires played up the risk to Iran's nuclear sites.  Shortly thereafter, the IAEA said there was no damage to nuclear sites and Iran said there were no plans for retaliation, despite previous warnings to the opposite effect.  With that, stocks and bonds began grinding back in the other direction--an effort that continues into early domestic trading.

Granted, there was a possibility that today could have been a rally day for the bond market, but as seen in the overnight trading session, that possibility depended on the escalation of war in the Middle East.  There aren't many other reasons for bonds to push back too much on recent weakness.  One of the only other reasons would be Friday position squaring and short covering, but that would be just as much of an indication of ongoing bearishness in bonds. In that sense, holding sideways is possibly the best victory we could have hoped for today. The fact that we've avoided Tuesday's high yields through the end of the week could even signal sideways vibes until May, at which point data and the Fed will let us know the direction of the next big move.

UMBS closed up 2 bps at 99.32.

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UMBS were in the green for once this morning.  Up 23 bps on the open.

In a departure from recent norms, the overnight session was somewhat constructive for bonds.  The gains weren't massive, but they were notable for being something other than losses.  Volume and buying picked up around 8:45am ET despite an absence of economic releases or market moving headlines.  One could make a case from some spillover from European bonds and ECB comments, but the timing doesn't line up very well.

All that having been said, we don't have to have an obvious fundamental motivation for a few bps of improvement

Jerome Powell pulled the rug out under bond bulls yesterday by acknowledging that inflation is too high and hinting that rate cuts are not coming any time soon. Punch line: Stick a fork in the June rate cut bet. The Fed funds futures now see one rate cut this year.

"The labor market remains very strong" as the unemployment rate remains under 4% for the longest period in more than half a century, Federal Reserve Chair Jerome Powell said on Tuesday. Even with this strength the labor market has been moving into better balance.

However, recent data demonstrates a lack of progress on inflation heading toward the Fed's 2% target

A couple of Fed speakers today, Meister and Bowman, likely to pile on Powell's message from yesterday that the Fed has no reason to worry about a rate cut anytime in the near future.

Bonds enjoyed their best day in more than a month and a half on Wednesday, which can't help but beg the question: why?  Days like today require a process of elimination and some guesswork.  We don't have a big, obvious market mover in play in terms of economic data or headlines.  Moving down the list of usual suspects, any time bonds have been as consistently weak as they have been recently, we can talk about "dip buying" (as in traders buying the dip in prices) as well as short covering (traders buying bonds to cover previous bets on higher rates).

Additionally, we can consider the stock market in the midst of it's biggest correction since last October and the possibility that some of that stock selling may be turning into bond buying.  Either way, the important consideration is that this is only one day and not necessarily a sign of anything new as much as it's a byproduct of things that have already happened.

UMBS closed the day up 48 bps at 99.58