We are excited to partner with one of our favorite mortgage minds, Lou Barnes, to bring you his biweekly commentary. Lou is a loan officer in Boulder, CO, but his insight is relevant across the country. Lou's opinions should not be construed as the opinions of CENTURY 21 Redwood Realty or our partner, Day 1 Mortgage.
Now we wait. Stephen Hawking: “Time is what keeps everything from happening at once.” Some things happen faster than others, or suddenly, or despite great anticipation then fizzle.
The wait list: the economy, the Fed, inflation fighting, the Biden watch, China, and Ukraine.
New Economic Data. In the first week each month we get the first and best reports from the prior month. Cut to the chase: with so much underway you’d think something had resolved and brought change, but nooOOOoo.
May payrolls grew by 390,000, the lowest figure in a year but still not sustainable given the rate of growth in the workforce. So wait a few months to see if it’s a truly overheated market or just the last stage of return to pre-Covid. Herb Stein’s Law: unsustainable trends are not sustained. If truly overheated and a propellant to future inflation, we would see wages ramping and we do not. Average hourly earnings in May grew by 3.8% annualized, down from 5.2% in the last year.
The twin ISM surveys of logistics managers are always the best snapshot of the condition of the overall economy, and in a time as weird as this the ISM site is worth a look at commentary by survey respondents. The manufacturing survey arrived at 56.1% (50 signifies flat) a little better than April, healthy and trendless. However, the price component is still explosive at 82.2%, and the apparently weak employment 49.9% shows trouble in hiring, not in demand. The service sector has been slipping for a year, its lowest read in May at 54.5%, down from 59.1% in April but still healthy; and prices and employment the same as manufacturing, 82.2% and 50.2% respectively.
The Fed. Leaders are in a tough-talk contest. Bostic (Atlanta prez and a middle-roader) suggested that after half-percent hikes at June and July meetings the Fed might pause in September. Vice-Chair Brainard instantly squashed that, consistent with Chair Powell that the Fed will hammer on until inflation falls to target. There is no meeting in August, but the Fed does use telephones. August is three months away. A lot can happen. Three months ago Vladimir invaded Ukraine.
New governor Waller has had his own battle with prices. He sold his existing home, went shopping in DC, pronounced the market “crazy” and his family rented instead. His term in office is seven years, and we’ll wait to see how that goes. After his housing experience, he favored “several” half-percent hikes. If he does enough damage, he’ll be able to buy. Housing is not crazy -- it could not be more rational during a 75-year-record crisis in supply. Hurting the economy enough to drive away buyers except Fed governors does not help, just paralyzes labor mobility.
The Fed intends to push up the overnight cost of money as far as necessary, but longer-term market rates have not moved in a month. Possibly because they jumped so fast beginning last fall in Fed anticipation. Now we’ll wait to see if Fed-fear renews after the June and July hikes.
In particular... the 10-year T-note and mortgages have not moved, holding just below 3.00% and 5.50%, respectively. Especially frozen, or waiting: the 2-year T-note stuck near 2.75%, a thunderous forecast for a Fed top at 2.50%. We’ll know at the end of July. BTW: always ignore the Fed funds futures and swaps markets as Fed forecasts, stick with 2s.
Inflation Fighting. It is not fair to criticize either the Fed or administration. No US leadership during inflation in the last hundred years has done well. The embarrassing part: not one has been honest. All have presumed honesty is suicidal: “We must slow the economy, which means intentionally reducing sales of everything from homes to socks, driving down the stock market, and causing losses of jobs. And in that order, with lags between each phase which will make excessive damage inevitable.”
This time, inside the Fed and out there is far too much emphasis on excessive consumption heat than damaged supplies. In 2019 the Fed hiked to 2.50%, then in the months before Covid in haste back down to 1.50%. Mortgages had touched 5.00% in late 2018, and while the Fed continued to hike, mortgages collapsed into the 3s. What is so overheated today that was not in 2018-2019? The work-at-home housing panic, topped now, but what else?
This is the one period of inflation in my lifetime which might respond to treatment other than intentional demolition. Extracts from ISM May survey commentary: “Exhausting. Continuous shortages, transportation delays and price increases all contribute to the destruction of historical lead times and firm commitments on delivery. Placing orders earlier and qualifying secondary sources. It is relentless. Consumer and builder demand continues to drive sales domestically. Covid in China continues to affect our supply chain more than the Russia-Ukraine war.”
Biden Watch. Joe is a good man trying hard but past his prime, which in his prime had been adequate for a senator or veep. He has never been good at finding the heart of the matter in economic policy or in the mind of the nation. He needs help, and to stay off stage except for carefully chosen, prepped and precise moments.
He is too old to run again. For the good of his presidency, party, and nation he needs to make that announcement as soon as possible. One reason is routine: to give our wacky process of nomination time for old and new candidates to appear and be tested.
The second reason is overriding: he needs to mobilize every cabinet officer to public -- daily on stage -- inflation fighting. Departments of Commerce, HUD, Labor, full list below. We can state the problem: SUPPLY CHAIN. The Democrats are big fans of government and Republicans hate it because it doesn’t work. Several in the cabinet will run for the top job, and no better means or time to audition. This is the perfect, unique time to show your stuff. Every damned day: “We have discovered a new supply issue, and the following remedies.” Then unlike American federal government, accept responsibility for results. Even the things which can’t be fixed, say why. Be visibly determined and inventive.
China. Over-emphasis is impossible... Xi and Party have this week been humiliated as no other China leadership since Mao. The choice came: open Shanghai or kiss the economy good-bye. The Party rats in their hazmat suits dragging people from homes to quarantine... gone in one day. Zero-covid had to be tried, was tried so in many places two years ago and failed. China’s Party-always-correct rigidity is at the edge of self-destruction.
Now we wait. To see if Covid roars back (odds 100:1 it will), what China will do then, how much economic damage is already done, and to Xi and Party.
Ukraine. Heavy and smart weapons are on the way. Training Ukraine military in those weapons is underway from Poland to the UK. Port blockade-busting soon. Both sides think time is one their side. We will wait until Vladimir learns that time is not on his side.
The US 10-year T-note in the last five years. Note the collapse of the Fed’s prior tightening campaign in 2018; then the big increase in long-term rates beginning in the fall of 2021, and the stall since April:
The Fed funds rate in the same period as the 10s chart above. Note blockheaded hikes continuing for nine months after 10s (and housing) faded, then rapid cuts:
The 2-year says that despite all the verbal blood-lust at the Fed, it will execute June-July half-percent increases from 1.00%, then add another half-percent in a pair of quarter-point hikes and stop:
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