Vital Statistics:
Stocks are higher this morning after comments from Trump supported Jerome Powell and signaled lower tariffs might be ahead with China. Bonds and MBS are up.
Donald Trump soothed markets yesterday with a statement that he wasn’t planning to fire Jerome Powell. In addition, he discussed Chinese tariff levels: “that 145% tariffs on China are “very high.” “It won’t be that high,” Trump said. “It will come down substantially.” Treasury Secretary Scott Bessent also predicted a deal can be reached with China. Stocks rallied as bargain-hunters scooped up tech stocks and the 10 year bond yield fell.
The bond market reaction to Trump reminds me of James Carville and Bill Clinton in 1993 when Bill Clinton wanted to stimulate the economy but the bond market rebelled and interest rates rose. Bob Woodward’s book The Agenda characterized Bill Clinton’s reaction: ‘You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of ——- bond traders?’ he responded in a half-whisper.”
As Clinton advisor James Carville once said: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
I suspect Donald Trump may have just learned the same lesson. The bond market always bats last.
Mortgage applications fell 12.7% last week as turmoil in the bond market kept borrowers on the sidelines. Purchases fell 6.6% while refis dropped 20.7%. “Overall mortgage application activity declined last week, as rates increased to their highest level in two months. The 30-year fixed rate rose for the second straight week to 6.9 percent, an almost 30-basis-point increase over two weeks,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “These higher rates drove a 20 percent drop in refinance applications, especially for higher balance loans, with the average loan size falling substantially. The refinance share of applications at 37.3 percent was the lowest since January. Similar to the previous week, economic uncertainty and rate volatility impacted prospective homebuyers as we saw a 7 percent decline in purchase applications. Both conventional and government purchase activity fell relative to the week before, but the overall level of purchase applications was still 6 percent higher than a year ago.”
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Homebuilder Pulte reported better than expected earnings of $2.57 which was a decline of 11% on an apples-to-apples basis. Revenues fell slightly, so the drop in earnings was mainly due to margin compression. “As the quarter progressed, buyers responded favorably to interest rate declines, but consumers remain caught between a strong desire for homeownership and the affordability challenges of high selling prices and monthly payments that are stretched,” added Marshall. “Given the structural shortage of housing, we remain constructive on long-term housing demand, and are adapting to the short-term impacts on consumer demand resulting from greater economic and financial uncertainty. PulteGroup’s balanced operating model, disciplined underwriting and financial strength position us well to navigate the increasingly dynamic environment and deliver value for our stakeholders.”
New orders declined about 7% on a per-unit basis as affordability challenges limited customer demand. The cancellation rate increased from 10% to 11%. Once other tidbit on the conference call about tariffs: “Our guide on gross margin assumes incentives remain elevated, at the elevated levels experienced in the first quarter. Further gross margins in the back half of the year, reflect the estimated impact of tariffs that have been imposed, which are expected to increase our house cost, by an estimated 1% of average selling price.”
FWIW, a 1% hit in ASPs is not that big of an impact. Pulte’s ASP is around $507k, so we are talking about roughly $5,000 in impact. The NAHB saw a $9,000 impact on average. Regardless, tariffs probably aren’t going to impact house prices – if anything they will probably get swallowed up in lower gross margins since the builders don’t seem to have much pricing power these days with stretched affordability. Bottom line: I don’t see tariffs moving the needle on shelter inflation.
PennyMac reported earnings yesterday. Origination volume came in at $28.9 billion, which was up 33% on a year-over-year basis. That said, production income fell as gain on sale margins compressed and fee income declined. The MSR portfolio also took a valuation hit. PFSI is valuing its current MSR portfolio at 5.3x.
