Live Markets: Prudent cost cuts could help U.S. mortgage lenders avoid carnage next year -Fitch

Finance of America Companies

30/10/2023 16:36

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      Main U.S. indexes gain: DJI out front, up ~1.1%
    

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      Comm svcs leads S&P sector gain; real estate weakest group
    

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      Dollar, gold dip; crude down ~3%; bitcoin up >2%
    

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      U.S. 10-Year Treasury yield rises to ~4.90%
    

  
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        PRUDENT COST CUTS COULD HELP U.S. MORTGAGE LENDERS AVOID
CARNAGE NEXT YEAR -FITCH (1235 EDT/1635 GMT)  
  
        Layoffs and other cost-cutting measures that non-bank
mortgage lenders in the United States have implemented since
last year will give them a bulwark against economic challenges
in 2024, Fitch Ratings wrote in a 
    note
     on Monday.
  
        Profits at such firms, in particular those that focus on
retail borrowers, will remain pressured but have already reached
their trough levels, the ratings agency said.
  
        Potential homeowners have been struggling due to a surge
in mortgage rates as the Federal Reserve keeps monetary policy
tight, with the rate on the most popular U.S. home loan 
    jumping to the highest
     since September 2000 earlier this month.
  
        With the benchmark interest rate expected to be higher
for longer, mortgage applications and refinancing activity will
remain subdued, Fitch estimated.
  
        Of the major players in the industry, shares of Rocket
Companies  RKT.N  and PennyMac Financial Services  PFSI.N 
surged 4% and 23% so far this year, respectively. 
  
        Finance of America Companies  FOA.N  and LoanDepot
 LDI.N , on the other hand, have lost 28% and 19%, respectively.
  
        
  
        (Niket Nishant)
  
         *****
  
    
    
    EQUITY FUNDAMENTALS LOOK OK BUT THE PAST IS NO GUIDE -CITI
(1215 EDT/1615 GMT)  
    It's not that this time is different, it's that this time
has never happened before, says Citi's U.S. equity strategy
team, acknowledging the pandemic era of the past four years
represents an abnormal period without comparison for investors.
    In short, U.S. unemployment jumped to 14.7% from 3.5% in
just 60 days when the global economy shut, then unprecedented
fiscal and monetary stimulus spurred an economic reopening as
part of a full business cycle in just 24 months, before the
Federal Reserve started to hike interest rates in March 2022. 
    "We have since seen the fastest tightening cycle in 40 years
and sticky inflation, all while a large portion of market
participants have only ever experienced zero interest rate
policy and a low inflation environment," says Scott Chronert,
part of the U.S. equity strategy team at Citi.  
    "One should expect a plethora of historical correlations to
break down," Chronert says in a note on Monday.
    While Citi's equity strategy team is constructive on the
fundamental outlook for the S&P 500 heading into 2024, thanks to
a perceived peaking of Fed hawkishness and the gradual
deceleration in inflation metrics, there are headwinds.
    "We know we are at risk of a pollyannaish view toward S&P
500 fundamentals. With that, there are many 'elephant in the
room' issues that ultimately need resolution," Chronert says,
pointing to government fiscal and foreign policy; monetary
policy and demographics.
    Interest outlays for Treasury debt have climbed to nearly
15% of federal tax receipts and if the Fed remains higher for
longer well into 2024, new issuance to fund deficit spending and
the refinancing of maturing Treasuries at higher coupon rates
will add more pressure, the Citi note says.
    Even if rates back off a bit to ease interest expense, the
fiscal situation could be become too large to ignore and may
become an important election issue next year. 
    The Fed may not want to return to zero interest rate policy
and quantitative easing again unless absolutely necessary.
    "A fear for us is that some portion of equity market
participants expect significant monetary stimulus in the event
of a modest economic slowdown. The downside may be more severe
if we find out the Fed put is no longer in place," Chronert
said.
    Finally, demographics may constrain labor force growth for
the next decade and pose a headwind to potential GDP growth.
    "With labor markets still fairly tight and limited labor
force growth expected in the medium-term, higher wage inflation
may be more persistent," he said.
    Corporate America has had ample time and warning to prepare
for the eventual response to Fed rate policy, a positive sign
for equities, but the list of outlined concerns cannot be taken
lightly, he said.
    
    (Herbert Lash)
     *****

    
    BOND MARKETS DUE TO CONSOLIDATE, BUT REPRIEVES WILL BE
SHORT-LIVED (1130 EDT/1530 GMT)
    The U.S. 10-Year Treasury yield  US10YT=RR  has been on a
march higher. In fact, the yield, which is now just shy of 5%,
is on pace to rise for a sixth-straight month. 
    Bob Doll, chief investment officer at Crossmark Global
Investments, believes value in bonds has improved considerably,
however, he also says that the catalyst for a sustained bond
bull market is still absent, and therefore any easing in yields
is likely to prove temporary.
    He does, however, now tilt toward being a buyer of bond
price weakness, rather than a seller on strength.
    "It is possible that another Silicon Valley Bank type bond
rally could emerge since many financial institutions have
additional portfolio losses as the bond bear market regained
momentum in recent months. In addition, the rapid and
significant rise in yield increases the probability of a
financial accident," writes Doll in his latest "Deliberations."
    Still, Doll believes that oversold bond markets are due for
a period of consolidation, which should ease selling pressure in
struggling equity markets.
    However, he believes reprieves will be "short-lived."
    Although Doll thinks the bond bear market is in it its
latter stages he also says that "The growth outlook for the U.S.
while weakening, still remains positive. However, cracks are
developing in China, emerging markets and some parts of the U.S.
economy while debt servicing burdens will continue to rise."  
               
    (Terence Gabriel)
     ***** 
    
    
    THE ENORMOUS ECONOMIC POTENTIAL OF GENERATIVE AI (1049
EDT/1449 GMT)
    Goldman Sachs is upgrading its global gross domestic product
(GDP) forecasts over a 10-year horizon to account for the impact
of generative AI.
    "Based on historical productivity gains... we anticipate
that any GDP growth boost won’t exceed 0.1pp until 2027 in the
US, 2028-2032 in other DMs and advanced EMs, and 2034 or later
in other EMs," said Goldman Sachs economists led by Jan Hatzius.
    The economists believe that the net effect of generative AI
on GDP is likely to be smaller, despite baseline estimates
implying a 10-15% cumulative long-run boost to GDP globally.
    One of the reasons for the smaller effect of generative AI
on GDP is that continued technological progress is already built
into existing estimates of trend growth as information and
communication technology investment has already been the main
driver of productivity growth in major economies over the last
20-30 years.
    Another reason is that the underlying productivity growth
trend has been slowing and would likely continue to do so in a
non-AI counterfactual.
    Regulatory or technical barriers to the adoption of AI may
delay productivity growth, adds GS.
    "Nevertheless, the enormous economic potential of generative
AI suggests growth upside even after taking these offsets into
account."
    
    (Reshma Rockie George)
     *****
    
    
    U.S. STOCKS ADVANCE IN EARLY TRADE (1020 EDT/1420 GMT
        Major U.S. averages are higher in the early stages of
trading on Monday, with the Dow  .DJI  and S&P 500  .SPX  on
track to snap three-session losing skids, which put the
benchmark S&P index down more than 10% from its July high at
Friday's close. 
  
        Gainers are led by the S&P 500 communication services
 .SPLRCL  sector, which is up roughly 2%, while energy  .SPNY 
is the sole declining sector as crude prices dropped more than
2% on 
    easing concerns about
     the Israel-Hamas war affecting supply from the region. 
  
        McDonald's  MCD.N  is gaining more than 1% after posting
its 
    quarterly results, buoyed by new launches, promotions and
demand for its more affordable burgers and fries, helping to
lift the Dow. 
    Western Digital  WDC.O  is jumping more than 8% after the
company said it would spin off its flash memory business that
has been grappling with a supply glut after talks of merging the
unit with Japan's Kioxia stalled.
    Below is your market snapshot: 
    
    
    (Chuck Mikolajczak)
     *****
        
  
        
  
        S&P 500 INDEX: MIGHT SCARY A OCTOBER, LEAD TO A DARING
NOVEMBER? (0900 EDT/1300 GMT)
    The S&P 500 index  .SPX , which ended Friday down about 4%
so far this month, is on track for a third-straight monthly
decline. In fact, the benchmark index is on pace for its biggest
October slide since 2018.
    Bulls are hoping for a better November. Since 1950, on
average, with a 1.7% rise, November has been the best month of
the year for the S&P 500 index.
    That said, with the SPX having ended Friday down 10.3% from
its July 31 closing high, traders have been forced to eye deeper
support levels:
     
      
    The SPX did end Friday at 4,117.37, which was just above a
weekly Gann Line, proving support around 4,116. Gann Lines are
trend lines running at certain angles off significant highs and
lows).
    This line dips to around 4,107 this week, and as stands
e-mini-S&P 500 futures  EScv1  are suggesting an opening bounce
for the SPX of more than 20 points.
    The index will now confront initial resistance in the at
4,155-4,175 area, which includes the 50% retracement of the 2022
decline and the 100-week moving average. 
    The 23.6% retracement of the March 2020-January 2022 advance
is at 4,198.70, and the early October low was at 4,216.45. There
is a weekly Gann Line proving resistance this week around 4,245.
    On the downside, a break of last week's 4,103.78 low would
suggest the SPX can threaten the early-May trough at 4,048.28,
while the 38.2% Fibonacci retracement of the 2022 decline is at
3,998.51.
    The rising 200-WMA should be around 3,945 this week. There
is a weekly Gann Line around 3,868 this week. The 38.2%
retracement of the Mar 2020-January 2022 advance is at 3,815.20,
and the March 2023 low was at 3,808.86.
    Meanwhile, the Nasdaq Composite  .IXIC  has also taken a
dive this October, though one internal measure, which is now
down to 7%, suggests it may be ripe to re-group - click here:   
    
    (Terence Gabriel)
     *****
 
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 (Terence Gabriel is a Reuters market analyst. The views
expressed are his own)