The Daily Tearsheet

Stocks are lower this morning as the Iranian war drags on. Bonds and MBS are up small.

Nonfarm productivity increased 1.8% in the fourth quarter as output rose 1.5% and hours worked decreased 0.2%. Unit labor costs rose 4.4%, driven by a 6.3% increase in compensation and a 1.8% increase in productivity. This was a substantial downward revision from the second estimate, driven primarily by an increase in unit labor costs.

The rise in labor costs is driven by rising compensation, which is generally a good thing but it won’t help the Fed with inflation. On the plus side, it does work at (slowly) attacking the affordability problem.

Construction spending fell 0.3% MOM in January according to the Census Bureau. It rose 1.0% on a YOY basis. Private residential construction fell 0.8% MOM and rose 2.3% YOY. Single family residential fell 0.2% MOM and 5.4% YOY. Multi fell 0.7% MOM and rose 0.2% YOY.

Chicago Fed President Austan Goolsbee said that monetary policy could go in either direction depending on what inflation does in the coming months: “We could be back to the environment with multiple rate cuts for the year, if inflation behaves. I could see circumstances where we would need to raise rates if it was going a different way and inflation was getting out of control,” Goolsbee said. He added that inflation is a bigger problem than the labor market: At the moment, I think inflation has got to be a little ahead of the employment.” Finally he is “fairly optimistic” that rates can move lower this year, although the war has “thrown a wrench into the plans.”

Stephen Miran is more dovish on rate cuts. “Looking 12 to 18 months out, there’s still not enough clarity to think that monetary policy itself should adjust in response to what has happened,” Miran said during an interview on Bloomberg Television. It’s still too early to conclude that the oil shock will bleed into inflation expectations, he added.

“If it looks like the oil shock is bleeding into inflation expectations beyond the first year, then you get really concerned about second-round effects,” he said. He’d also be worried if the shock appeared to cause a wage-price spiral.

Miran also drew a comparison between the oil shock when Russia invaded Ukraine and now. When Russia invaded Ukraine, monetary policy was highly accommodative: “That’s not the case right now. We’re not hitting the gas on demand that would interact with the higher oil price in a way that would reverberate through the economy right now. That’s not the case at all.”

The December Fed Funds futures see no further action out of the Fed as the most likely scenario, and are handicapping a 13% of 25 basis point increase in rates and 22% chance of a 25 basis point cut.

The private equity fund issue continues, with Apollo limiting withdrawals and paying out to investors about 45% of the capital they have requested. “Today’s decision reflects our ongoing commitment to long-term value creation for the Fund’s shareholders,” Apollo said. “As long-term stewards of capital, we have a fiduciary duty to act in the best interests of all Fund investors, balancing the interests of shareholders seeking liquidity with those who choose to remain invested.”

The private equity meltdown has the potential to spill over to the mortgage market, particularly the non-QM sector. Apollo has a lot of different funds, however it has been a big buyer of non-QM loans.

Mortgage REITs are generally a sleepy sector of the stock market. They are bought more for their high dividend yields than their stock price appreciation. Aside from moments of abject terror like the early days of COVID, they tend to be good additions for investors looking for yield. That is why it is unusual to see a bidding war for one.

Two Harbors is the subject of a 3 way bidding war between United Wholesale, Cross Country and an undisclosed third party. Two Harbors owns Roundpoint Servicing and a portfolio of agency RMBS and MSRs. The stock got caught up in the liquidity air pocket of 2020 with the whole sector and never really recovered. It does pay a fat dividend yield of 12.4%.

Stocks are higher on positive developments in the Middle East. Bonds and MBS are up.

The week ahead will be relatively data-light, with a revision to productivity and consumer sentiment. We will get plenty of Fed speakers.

President Trump told Iran he would postpone strikes on critical energy infrastructure for 5 days, citing progress in talks to re-open the Strait of Hormuz. Trump said earlier in a post on his Truth Social platform that the U.S. and Iran had “VERY GOOD AND PRODUCTIVE CONVERSATIONS REGARDING A COMPLETE AND TOTAL RESOLUTION OF OUR HOSTILITIES IN THE MIDDLE EAST.”

That said, Iranian state media denied it. “There is been no negotiation and there is no negotiation, and with this kind of psychological warfare, neither the Strait of Hormuz will return to its pre-war conditions nor will there be peace in the energy markets,” state media reported the official as saying.

Regardless of the back-and-forth we are seeing positive developments in the markets, with stocks moving higher, oil lower and are even seeing some signs of perkiness in the erstwhile dour bond market.

One of the surprises so far has been MBS spreads. MBS spreads are the difference in yield between mortgage backed securities and their correspondent Treasury rate. MBS spreads are a function of a lot of things, but their biggest driver is interest rate volatility. Despite the spike in Treasury yields, MBS spreads have moved up marginally, but not dramatically.

Bond market volatility is captured by the MOVE Index, which is published by ICE. Bond volatility has spiked in response to the Iranian situation. Both charts below cover the past 5 years, so you can see how they correlate and spikes in volatility will drive increases in MBS spreads.

What does this mean for rates? Lower mortgage rates are on borrowed time. They should be higher given what is happening in the bond market. It seems like MBS investors are looking through the situation in Iran and concluding that it will be short. If that proves to be incorrect, expect mortgage rates to move significantly higher. Conversely, if the situation in Iran ends as quickly as it started, don’t expect a huge move downward in mortgage rates because they never properly adjusted higher in the first place.

The Chicago Fed National Activity Index decreased in February, suggesting growth is slowing. The CFNAI is sort of a meta-index of 85 different indicators which look at production, employment, sales and consumption. In February, sales and production were generally flat, while employment was a negative contributor to the index. The February jobs report, which showed a decrease in payrolls explains the employment number.

Stocks are lower this morning as hostilities continue in the Strait of Hormuz. Bonds and MBS are flat.

New home sales fell 18% MOM and 11% YOY to a seasonally adjusted annual rate of 587,000 units. This was an inauspicious start to the 2026 season. Note that new home sales estimates have huge standard deviations, so you should take any big moves with a grain of salt.

There were 476,000 new homes for sale at the end of the month, which represents a 10 month supply. There are a lot of new homes for sale right now, and inventory (as represented by month’s supply) is higher than the long term average of around 6 – 7 months.

The Index of Leading Economic Indicators fell slightly in January, according to the Conference Board. “The U.S. LEI fell further in January, as consumer expectations retreated again and building permits softened,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “While the topline LEI continues to signal headwinds to economic activity, the strengths among its components on the six-month basis were widespread for three straight months (November 2025–January 2026), with 7 out of 10 components advancing. As the latest LEI data do not yet reflect the impact from war in Iran, The Conference Board revised GDP growth down by 0.1 ppt to 2.0% y/y for 2026, which will be lower than growth in 2025.”

Market indicators (stock market performance, credit spreads), were positive contributors, while housing and consumer confidence had negative impacts.

Home flipping profits are the lowest since the Great Recession, according to data from ATTOM. This is interesting because it seems a lot of capital is flowing into the RTL space. Last year, about 297k homes were flipped which was the lowest since 2020. The flipping business boomed in the aftermath of the Great Recession as a glut of undervalued properties hit the market. Now it is harder as inventory is more picked-over and margins are lower.

“Competition for homes remains strong in many markets due to constrained supply,” said Rob Barber, CEO of ATTOM. “With prices staying elevated, investors are finding it harder to secure deals that deliver strong returns.”

“Flippers are having to get more creative to maintain profitability,” he added. “That could include taking on older homes, as the median flipped property in 2025 was built in 1978, the oldest since we began tracking, along with tighter cost control and more disciplined renovation strategies.”

The MBA put out a statement of support for the proposed new Basel regulations for banks. The proposal would eliminate the harsh treatment of mortgage servicing rights, and also take a more nuanced approach to the required capital for mortgages in general. Right now, mortgages are treated the same, whether or not the underlying property has a lot of equity or very little.

The federal banking agencies’ updated Basel III proposal represents a pivotal step toward a more balanced and risk-aligned approach to capital standards affecting mortgage lending and commercial real estate finance.

Capital rules are notoriously complex, but based on our initial review, the re-proposal incorporates several priorities long advocated by MBA, including more risk-sensitive capital requirements using loan-to-value ratios and the opportunity to consider the recognition of credit enhancements such as private mortgage insurance. It also takes important steps to reduce the punitive treatment of mortgage servicing rights and commercial real estate loans.

MBA will review the proposal closely and looks forward to engaging in the formal comment process, including on key technical elements such as the appropriate capital treatment of mortgage servicing assets and the broader application of these reforms across the banking system. We stand ready to work with the agencies on a final framework that better supports sustainable mortgage origination and warehouse lending, robust servicing capacity, and continued access to affordable home financing offered by both depositories and independent mortgage banks.”

Stocks are lower this morning after a wave of strikes in Iran. Bonds and MBS are continuing the sell-off after yesterday’s hot PPI report.

As expected, the Fed maintained rates at current levels, with Stephen Miran dissenting, who wanted to cut rates. The statement referred to “somewhat low” job gains and “somewhat elevated” inflation.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The implications of developments in the Middle East for the U.S. economy are uncertain. The Committee is attentive to the risks to both sides of its dual mandate.”

The forecast for economic growth was nudged up for 2026 and 2027, while the unemployment forecast was steady at 4.4%. The PCE Price index forecast was bumped up from 2.4% to 2.7% while the core rate was raised from 2.5% to 2.7%

The dot plot looks like we might get one more rate cut this year. The range of outcomes has compressed compared to December, however we are slightly more hawkish.

At his press conference Jerome Powell said: “The forecast is that we will be making progress on inflation, not as much as we had hoped, but some progress on inflation.” He also pushed back on the use of the term stagflation: “I always have to point out that that was a 1970s term, at a time when unemployment was in double figures and inflation was really high,” he said. “We actually have unemployment really close to longer-run normal, and we have inflation that’s 1 percentage point above that.”

He added, “I would reserve the term stagflation for a much more serious set of circumstances.”

The Fed Funds futures see about a one-in-three chance of another rate cut this year, and is pricing in some small probability of a rate increase. Separately, the Bank of England maintained rates at current levels, citing uncertainty in the Middle East. Until the Strait of Hormuz is back open, oil will remain elevated and central banks will have inflationary pressures to deal with.

Separately, Powell said he isn’t going anywhere until the DOJ ends its probe into him over the Fed renovations.

Independent Mortgage Bank profits declined in the fourth quarter to $674 per loan compared to $1,201 in the third quarter. Given that the mortgage business is pretty seasonal this sequential decline is to be expected. The gain of 17 basis points compares favorably to a loss of 4 basis points in the fourth quarter of 2025.

“Net production profits averaged 17 basis points in the fourth quarter of 2025, an increase from losses of 4 basis points in the fourth quarter of 2024,” said Marina Walsh, CMB, MBA’s vice president of industry analysis. “Combining both production and servicing operations, 68% of mortgage companies in MBA’s sample posted overall profits in the fourth quarter of 2025, a modest increase from 61% one year ago.”

Added Walsh, “Despite these improvements, fourth-quarter production profits were down from the previous quarter. Compared to the third quarter of 2025, production volume rose, production revenues dropped, and the cost to originate stayed relatively flat.”

Stocks are flattish despite a lousy PPI report. Bonds and MBS are up small.

The FOMC decision is due at 2:00 pm this afternoon. We will get a new dot plot and updated economic forecasts. The Fed is not expected to make any changes to policy, although markets will be focusing intently on their forecasts for inflation.

The Fed Funds futures still predict two more rate cuts this year, but now see only one cut as the second most likely outcome.

Inflation at the wholesale level rose 0.7% in February, after rising 0.4% in December and 0.5% in February. Final demand services drove the increase. About 20% of the increase was driven by a 5.7% increase in hotel prices. Rising food prices also contributed to the increase.

The PPI ex food and energy rose 0.5% MOM and 3.9% YOY,

Mortgage applications decreased 10% last week as purchases rose 1% and refis fell 19%. “Mortgage rates continued to move higher, driven by increasing Treasury yields as the conflict in the Middle East kept oil prices elevated, along with the risk of a broader inflationary shock. Mortgage rates increased across the board, with the 30-year fixed rate rising to 6.3%, the highest rate since December 2025,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Rates were around 20 basis points higher than they were two weeks ago and this caused a reversal in refinance activity, particularly for conventional refinance applications, which decreased 27% over the week. Government refinances also declined but by 5%, as FHA rates have not increased quite as rapidly. Purchase applications remained steady despite the higher rates, with conventional purchase applications unchanged and growth in both FHA and VA segments. Overall purchase applications remained ahead of last year’s pace, continued to be supported by higher inventory and slowing home-price growth in many markets.”

Pending Home Sales rose 1.8% in February, according to the National Association of Realtors. “The slight gain in pending contracts appears to be driven by improved affordability conditions. However, those conditions could reverse if higher oil prices lead to an uptick in mortgage rates,” said NAR Chief Economist Dr. Lawrence Yun. “The Midwest—the most affordable region of the country—was the strongest performer in February. But the Northeast was held back by a combination of higher home prices and a shortage of supply.”

Stocks are higher this morning as the Fed begins its meeting. Bonds and MBS are up.

Homebuilder sentiment improved in March according to the NAHB Housing Market Index. Rates have been improving, but affordability remains a big constraint. The latest events in Iran certainly aren’t helping things. More than a third of builders reported cutting prices by an average of 6%.

“Affordability for buyers and builders remains a top concern,” said NAHB Chairman Bill Owens, a home builder and remodeler from Worthington, Ohio. “Many buyers remain on the fence waiting for lower interest rates and due to economic uncertainty. Builders are facing elevated land, labor and construction costs and nearly two-thirds continue to offer sales incentives in a bid to firm up the market.”

“While the Freddie Mac 30-year fixed rate mortgage averaged 6.05% in February, the lowest since August 2022, downpayment hurdles and uncertainty from the conflict with Iran and the price of oil will be headwinds going forward,” said NAHB Chief Economist Robert Dietz. “The administration’s executive orders issued last week to reduce regulatory burdens associated with home building are a positive step toward increasing attainable housing supply.”

I am not so sure new home supply is the big issue here given the glut of inventory:

We are at levels last seen during the housing bust of 2006-2008. The homes are out there.

The NAHB is also happy with the recent executive orders and legislation on housing:

“NAHB commends President Trump for taking bold actions to empower home builders to build the housing supply America needs. Today’s executive orders get at the root of the housing affordability problem by eliminating obstacles to build more homes and providing better access to financing.

“The president’s executive order to remove regulatory barriers will enable builders to build more housing by reducing red tape, streamlining permitting requirements and easing costly environmental regulations. The executive order for access to mortgage credit also takes important steps to provide better financing options for home buyers and home builders and make it easier for families to achieve the American dream of homeownership. NAHB looks forward to working with the Trump administration to implement these important directives.”

Industrial Production and Manufacturing Production both increased by 0.2% MOM in February. Capacity Utilization increased to 76.3%

Stocks are higher this morning as oil finds its footing. Bonds and MBS are up.

President Trump has asked allies for help in re-opening the Strait of Hormuz. He is specifically asking China. Given that China gets a lot of its supply through the Strait, it should be in their best interest to help out. As Trump noted, the US doesn’t get its oil from the Persian Gulf – it gets it domestically and from the Americas.

“I’m demanding that these countries come in and protect their own territory, because it is their territory. It’s the place from which they get their energy. And they should come and they should help us protect it,” Trump said.

“Why are we maintaining the Hormuz Strait when it’s really there for China and many other countries? Why aren’t they doing it?”

The week ahead will be dominated by the FOMC meeting on Tuesday and Wednesday. The Fed is expected to maintain rates at current levels, so the meeting should be a nonevent. Aside from the FOMC meeting we will get the PPI and new home sales.

Consumer sentiment fell 2% in March, according to the University of Michigan Consumer Sentiment Survey. About half of the interviews were collected before the military action in Iran. Year-ahead inflation expectations were flat at 3.4%, while longer-term expectations declined slightly.

Job openings in January rose to 6.946 million, which was well above expectations. They are still down on a YOY basis. The quits rate was unchanged at 2.0%. Healthcare and trade / transportation / utilities saw the biggest increases, while professional / business services saw the biggest decline.

Stocks are higher as we round out a volatile week. Bonds and MBS are up small.

Personal incomes rose 0.4% in January, according to BEA. Disposable personal incomes rose 0.9%. Personal outlays rose 0.4%.

The PCE Price Index for January rose 0.3% MOM and 2.8% YOY. The core rate, which strips out food and energy rose 0.4% MOM and 3.1% YOY.

The inflation numbers were more or less in line with expectations and don’t change the inflation narrative a bit.

Fourth quarter GDP growth was revised down from an initial estimate of 1.4% to 0.7%. All components of GDP were revised downward. The government shutdown was certainly a drag on economic growth, so the fourth quarter was destined to be weak.

The Atlanta Fed GDP Now model was predicting 5% GDP growth for Q4, so that model really got it wrong. This is from Jan 28. Looks like the Blue Chip Consensus had it more or less correct, but the model was way off. Given the consumer sentiment numbers, the layoff announcements, declining job growth etc, this estimate always looked like an outlier.

Durable goods orders disappointed as well.

The Senate passed its affordable housing bill yesterday, and it was overwhelmingly embraced on a bipartisan basis. Republican Tim Scott and Democrat Elizabeth Warren sponsored the bill.

The bill will make it easier for manufactured housing to get loans, which should help on the affordability front. Mannies will no longer have to be attached to a permanent foundation.

The bill directs the CFPB to give a report on LO comp policies and point / fee caps to see how they affect small dollar loans and state affordable housing initiatives. Many lenders avoid these loans simply because the rules make them unprofitable. I wonder if this is the first salvo in a plan to relax LO comp rules that require the commission to remain the same regardless of the product.

The bill also bans institutional investors from purchasing single family homes. The MBA issued a statement saying that this will limit build-for-rent supply and they are probably correct. The institutional investor ban was always a specious solution to the affordability problem.

Stocks are lower this morning as oil rises despite a record release from the IEA strategic reserve. Bonds and MBS are up small.

Housing starts rose 7.2% MOM to a seasonally adjusted annual rate of 1.487 million units in January, which was above expectations. This was up 9% on a YOY basis. Building permits fell to an annual rate of 1.376 million. This was a decrease of about 5% on a monthly and annual basis.

The 10 year auction went off fine yesterday with a 4.217% yield and a 2.45 bid to cover ratio.

The International Energy Agency agreed to release 400 million barrels of oil to alleviate market stress over Iran. “The conflict in the Middle East is having significant impacts on global oil and gas markets, with major implications for energy security, energy affordability and the global economy for oil,” IEA Executive Director Fatih Birol said in remarks broadcast from the group’s headquarters in Paris.

“I can now announce that IEA countries have unanimously decided to launch the largest-ever release of emergency oil stocks in our agency’s history,” Birol said. IEA members currently hold more than 1.2 billion barrels of public emergency oil stocks, with a further 600 million barrels of industry stocks held under government obligation.

Separately, Energy Secretary Wright said that US warships are not quite ready to begin escorting tankers through the Strait of Hormuz. “It’ll happen relatively soon but it can’t happen now,” Wright said. “We’re simply not ready. All of our military assets right now are focused on destroying Iran’s offensive capabilities and the manufacturing industry that supplies their offensive capabilities.”

Purchase lock rebounded in February, according to Optimal Blue. After a slow start to the year, we are seeing more interest in home purchases, especially from the first time homebuyer. Lower rate (and tighter MBS spreads) are helping things. While affordability is still strained, it is not nearly as bad as it was 4 years ago and has been helped by falling mortgage rates, flatlining home prices and wage growth. Wage growth has been outstripping home price appreciation for years.

Stocks are flattish after good earnings from Oracle. Bonds and MBS are down. Bond yields should be falling in theory after the CPI report, but we are seeing European yields spike this morning (Bund yields up 9 basis points, Gilts up 12 basis points) and global sovereigns tend to correlate.

The consumer price index rose 0.3% MOM and 2.4% YOY, while the core rate (excluding food and energy) rose 0.2% MOM and 2.5% YOY. The index for shelter rose 0.2% MOM and 3.0% YOY and was the biggest item in the index. Energy services picked up, as did food from home (i.e. groceries). Gasoline fell. Note the spike in energy prices from Iran isn’t captured in the February data.

Overall, it shows that inflation is working its way back to back to the Fed’s target despite the effects of tariffs. The hyper-inflation scenario has simply failed to play out.

Existing home sales rose 1.7% MOM to 4.06M units. This was a small decrease on a YOY basis. “Housing affordability is improving, and consumers are responding,” said NAR Chief Economist Dr. Lawrence Yun. “Still, there is a long way to go to return to pre-pandemic levels of transaction activity. There are more than 6 million more jobs than in 2019, yet home sales per year are down by one million.”

“Despite the modest gain in home sales, actual housing demand remains muted relative to wage growth and job gains,” Yun continued. “Wage growth is now outpacing home price growth by almost four percentage points. Mortgage rates are also measurably lower compared to a year ago.”

“Inventory is growing, but sluggishly,” he added. “If demand picks up notably in the coming months and outpaces supply growth, home prices will inevitably rise. That is why increasing supply is so important to help limit home price growth, improve housing affordability, and boost transactions.”

Inventory was up slightly to 3.8 month’s worth of supply. A balanced market is around 6 – 6.5 months’ worth, so we still have restricted supply. First time homebuyers accounted for 34% of sales, up from 31% a year ago.

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Mortgage applications rose 3.2% last week as purchases increased 7.8% and refis rose 0.5%. “Financial markets were volatile last week amid the ongoing turmoil in the Middle East. Mortgage rates increased on net over the week, while refinance volume was roughly flat. Borrowers in recent weeks were able to get 30-year conforming rates below 6%, but with the current volatility, longer-term rates have moved up, pushing up the 30-year fixed rate to 6.19%,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Purchase activity increased last week, particularly for FHA loans, which moved up more than 11%. The pace of homebuying continues to track ahead of last year’s pace, with overall purchase volume up 10%. More inventory on the market is supporting more transactions.”