Vital Statistics:
Stocks are higher this morning on no real news. Bonds and MBS are up.
First quarter GDP was revised downward from -0.2% to -0.5%, which was driven primarily by a downward revision in consumption. The real final sales to domestic purchases (kind of an ex-trade balance measure of GDP) was revised downward from 2.5% to 1.9%. The advance estimate was 3.0%, so this was a substantial downward revision. Jerome Powell had dismissed the weak Q1 GDP print because it initially looked like GDP ex-trade was robust, but this revision takes it from robust to just ok.
When you take into account the internals of the employment report – that unemployment was held steady simply by people falling out of the labor force, it looks like the economy is on a weaker foundation than it initially appears.
Having monetary policy tight by 100 basis points is not the appropriate stance, based on the current numbers. Absent trade noise, policy would be neutral, and there would be talk about potentially easing to support the economy.
In other economic news, durable goods orders rose 0.5% ex-transportation, and initial jobless claims fell to 236k.
The WSJ is reporting that Trump is considering announcing a new Fed Chairman early in order to light a fire under Jerome Powell to begin cutting rates. Potential candidates include former Fed governor Kevin Warsh and National Economic Council director Kevin Hassett. Other potential candidates include former World Bank President David Malpass and Fed governor Christopher Waller.
Treasury Secretary Scott Bessent had previously said that the Administration won’t even start interviewing candidates until September. Jerome Powell’s term will run out in May. Naming a replacement early will run the risk of undermining Powell, as the replacement will be asked to weigh in on current Fed decisions by the media.
If Friday’s PCE inflation data remains benign, the pressure on the Fed to cut rates will only increase. I would expect more Fed speakers to admit that things haven’t played out the way they expected.
The July Fed Funds futures are building in a chance for a rate cut (currently the odds are about 25%) and the September futures see a 90% chance. The December futures now see 3 rate cuts as the most likely scenario. Note that even there, monetary policy will still be tight, albeit marginally.
New home sales fell 13.7% MOM and 6.3% YOY to a seasonally adjusted annual rate of 623,000. The inventory of homes for sale is about 9.8 months at the current sales pace. This represents a glut of homes for sale. The median home price rose 3.7% to $426,000, while the average home price rose 2.2%.
Given the glut of inventory, builders don’t have the pricing power to pass along any tariff-related price increases, and will just have to accept lower gross margins.
An avowed socialist has won the Democratic Primary for mayor of New York City. Rent controls will increase under his watch, which should mean bad things for multifamily investors, and his proposals for higher taxes should accelerate businesses moving to the suburbs or leaving NY altogether. Flagstar (which has a lot of exposure to NYC multi-fam) needs this like it needs another hole in its balance sheet.
