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.