Stocks and Mortgage Bonds are both lower to start the day. Pressuring Bonds again is hotter inflation data overseas, this time from Australia. Yesterday, we saw a similar story from Canada.
New Home Sales
New Home Sales, which measures signed contracts on new homes, fell 11.3% in May to a 619,000 unit annualized pace, which was weaker than estimates. But this report looks much worse because of a big upward revision to April – The originally reported figure of 634,000 was revised higher to 698,000. When factoring in that revision, sales really only fell 2.4% from the originally reported number in April. Sales are now down 16.5% year over year.
There were 481,000 new homes for sale at the end of May, which was up from 474,000 in Aril. At the current pace of sales, there is an 9.3 month’s supply, which is up from 9.1. However, only 99,000 are completed, and when looking at the pace of sales vs homes that are completed (available supply), there is only a 1.92 months’ supply, up from 1.62 in April.
The median home price was reported at $417,000, which is flat from the previous report and down 1% year over year. The decline is not due to home prices falling, but rather more lower priced homes being built and selling, causing the median sale price to drop.
Fed Governor Lisa Cook Comments
Fed Governor Lisa Cook spoke yesterday and like SF Fed President Mary Daly, she too seemed in favor of a rate cut. She cited significant progress on inflation and a cooling labor market and that it will be appropriate at some point to reduce the level of policy restriction to maintain a healthy balance in the economy – Meaning not be too tight and cause a hard landing or recession.
Cook understands how inflation works and she thinks the monthly readings will be favorable, but because of the replacements, thinks we won’t see much more progress on annual inflation.
She said data suggests payroll job gains were overstated last year and may continue to be this year.
She also said that with more workers entering the economy (from immigration), the monthly job gains needed to keep the unemployment rate steady has risen from just under 100,000 to nearly 200,000.
Overstated Jobs Data
The jobs data from the BLS has been overstated, as many of the Fed members are now acknowledging. The BLS releases a close to real time estimate, which then gets revised two times over the following two months.
Looking at 2023, the average revision after two months was -30,000. That means that just based on the BLS revisions, Job growth was revised lower by 30,000 per month on average or job growth was overstated by 360,000 jobs in 2023. So far for 2024, the mean revision is -43,000 month, so this is continuing.
But then we get the QCEW Data, which revises the numbers further and is the actual data, covering 95% of jobs in the US. Instead of looking at 666,000 businesses, it looks at almost 12M. Looking at all of 2023, the BLS reported 2% job growth, but the QCEW shows only 1.5%.Doesn’t sound like much, but it was overstated by 770,000 jobs.
That means that 1 in 4 job gains, AFTER the BLS’ own revisions, never happened. It also means that factoring in their own revisions, job growth was overstated on average by 94,000 jobs per month. Think about how the market and Fed would have reacted if we saw 94,000 less jobs each month…it would have been a completely different story.
Mortgage Applications
Interest rates fell slightly from 6.94% to 6.93% last week, and with rates staying beneath 7% for the second week in a row, there was a bit more purchase demand. Rates were 0.2% higher than they were this time last year.
Purchase application volume increased for a third straight week, this time by 1.2%. They are still down 13% from last year. Refinance volume was flat, but is now up 26% year over year. Refi’s made up 35% of all applications.
It’s important to note that last week included the Juneteenth Holiday, and the MBA does a poor job of seasonally adjusting the numbers, so we will likely get more reliable numbers and additional clarity next week.
Technical Analysis
Mortgage Bonds are still trading in the wide range that they have been, but tested support at the 100.427 Fibonacci level and 25-day Moving Average, which seems to have halted the move to the downside and is holding for now.
The 10-year is also in a very wide range between support at 4.18% and overhead resistance at the 100 and 200-day Moving Averages. Yields do have more room to move higher, which is something to keep an eye on.
We still believe that Friday’s PCE (Personal Consumption Expenditures) report has a good chance of being favorable for the Bond market, so as long as we remain in these ranges and support on MBS holds, we would like to remain patient.
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