The Boock Report

While the Fed will hike today by 25 bps (I reiterate my belief that it is a mistake), the fed funds futures are predicting as of today that there is a 50 bps chance that they take it back at the July 26th meeting and by yr end another one thereafter. And by the end of next year, 200 bps of these hikes are priced to be reversed. While Powell will likely hint at a time out today by using code words like “we’re no longer on a preset course”, “we’re very data dependent now”, blah, blah, blah, if he wants to maintain a tight stance after the time out he will likely try to discourage the markets from thinking he will start aggressively cutting over the next year plus and that higher for a while is their new theme. Also, I want to hear more about the balance sheet. How much QT do they want? What’s the size of the balance sheet they would be most comfortable with? While the Fed says it’s on auto pilot with QT, we want to know where that plane is going to land. 

The left is not happy with another hike today as Elizabeth Warren, Bernie Sanders and others wrote Jay Powell a letter on Monday that said “While we do not question the Fed’s policy independence…” we think you are dead wrong by hiking again, are making a major mistake and a lot of people are going to lose their jobs, I paraphrase. //www.warren.senate.gov/imo/media/doc/Fed%20monetary%20policy%20letter_05.01.23%20FINAL1.pdf

There is not a question of whether the access to credit gets crimped, it’s by how much, what will it cost the borrower from here and how much more equity will be needed to close a deal. And it won’t be just from the banks, all investors of any stripe are tightening their own internal standards. You will also hear from private credit people who will say they’ll come to the rescue and fill the lending holes of the banks but they’ll only do so at double digit interest rates. Here was from the earnings call from Camden Property Trust (the large sunbelt focused multi family REIT) last Friday, which I cited on Monday with regards to rental increases, who gave a bank lending anecdote:

“legacy deals are already funded” BUT, “What’s happening today however which is being exasperated by the banking crisis is that banks are pulling loans…I’ll give you an anecdotal example. A developer in Florida called and said that they had a fully funded deal with 35-40% equity, 6% debt, and the lender pulled the debt after the Silicon Valley Bank situation. And they walked away from their earnest money and lost a significant amount of money because the bank pulled the debt. And when I talk to my friends at regional banks, I mean they’re not funding deals that they thought they would fund in the future.” The CEO believes “the banking crisis has created in essence almost another 25 to 50 bp rate increase as a result of those banks just pulling out of the market altogether.”

I include here again the influence of small and medium sized businesses on bank lending and their bank lending market share according to the Federal Reserve:

Loans overall 38%

C&I Loans 28%

Residential RE 37%

CRE 67%

Credit Cards 27%

Auto Loans 15%

Other Consumer Loans 48%

Here is what LendingTree said in their earnings call yesterday:

“In Consumer, higher short term interest rates set by the Fed appear to finally be having the intended effect. Close rates have declined across all loan types with lending partners tightening their underwriting requirements and slowing the pace of loan origination. We expect that this trend will continue as the year progresses.”

Ahead of the ECB meeting tomorrow, the ECB released its Bank Lending Survey yesterday. It said “In the April 2023 BLS, euro area banks indicated that their credit standards for loans or credit lines to enterprises tightened further substantially in the first quarter of 2023. From a historical perspective, the pace of net tightening in credit standards remained at the highest level since the euro area sovereign debt crisis in 2011.” 

As for households, “Banks also reported a further substantial net tightening of credit standards for housing loans in the first quarter of 2023, while the net tightening became less pronounced for consumer credit.” 

With an average 30 yr mortgage rate of 6.50% vs 6.55% last week and 6.43% in the week prior, purchase applications fell 2% w/o/w after rising by 4.6% last week. They are lower by 32% y/o/y. Refi’s were up .8% w/o/w but still down by 51% y/o/y. The dearth of existing homes for sale are resulting still in bidding wars and encouraging builders to add new home supply but the overall pace of transactions are muted as purchase applications are near the lowest since early 2015.

Purchase Apps

India’s economy continues to be a standout and the S&P Global services PMI for April rose to 62 from 57.8. India remains a very exciting story with 40% of its population under 25 yrs old. 

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