Morning Report: The service economy improves

Vital Statistics:

Stocks are flattish as oil surges on an OPEC production cut. Bonds and MBS are down.

The week ahead is relatively data-light as is typical in the week after the jobs report. The Fed is in the quiet period ahead of next week’s FOMC meeting, so there won’t be any Fed-speak either.

Regulators are planning to increase capital requirements for the big banks by up to 20% in response to the regional bank crisis that took down Silicon Valley Bank and others. Even banks that rely primarily on fee income will see an increase. The plan is to characterize fee income as an operational risk. I didn’t see anything regarding mortgages – especially servicing, however I would imagine they might look again at capital hits for servicers.

Regulators also intend to do something about held-to-maturity securities which are underwater.

Investor purchases of homes fell by almost 50% in the first quarter compared to a year ago. This is the largest decline on record, and occurs as asking rents are beginning to level out (or even decline in some markets) while borrowing costs are surging.

“While investors have pumped the brakes on home purchases, they’re still scooping up a bigger share of homes than they were before the pandemic, which can create challenges for individual buyers at a time when there are so few homes for sale,” said Redfin Senior Economist Sheharyar Bokhari. “Investors have gravitated toward more affordable properties due to still-high housing costs and rising mortgage rates, which has left first-time homebuyers with fewer starter homes to choose from.”

Interestingly, the number of multi-family units under construction is massive as apartments flood the market. Single-family construction remains moribund.

With the debt ceiling business taken care of, the next shoe to drop will be the resumption of student loan payments starting in September. There are an estimated 27 million borrowers who will resume an average monthly payment of $400 – $460. This will almost assuredly knock down consumer spending and I wouldn’t be surprised if the record-low delinquency numbers return to normal.

The service sector improved in May, according to the S&P PMI. “The US continued to see a two-speed economy in May, with the sluggishness of the manufacturing sector contrasting with a resurgent service sector. Businesses in sectors such as travel, tourism, recreation and leisure are enjoying a mini post-pandemic boom as spending is switched from goods to services.

“However, just as demand has moved from goods to services, so have inflationary pressures. While goods price inflation has fallen dramatically in May to register only a marginal increase, prices charged for services continue to rise sharply. Although down considerably on last year’s peaks, service sector inflation remains higher than any time in the survey’s 10-year history prior to the pandemic, bolstered by a combination of surging demand and a lack of operating capacity, the latter in part driven by labor shortages. “However, while rejuvenated service providers will make hay in the summer season, the weakness of manufacturing raises concerns about the economy’s resilience later in the year, when the headwind of higher interest rates and the increased cost of living is likely to exert a greater toll on spending.”