Stocks are lower as Iran ups its attacks on US warships. Bonds and MBS are down.
Note that the sell-off in bonds is global. Japanese government bonds, UK Gilts, German Bunds etc. are all seeing increased rates. The European Central Bank raised rates 25 basis points this morning to 2.5%. Needless to say this isn’t helping the case in Treasuries.
The 10-year Treasury has picked up almost 100 basis points in yield since March:
Inflation at the wholesale level rose 0.4% MOM and 5.4% YOY. The index ex-food and energy rose 0.3% MOM and 4.7% YOY. The producer price index is an input into consumer inflation, not final inflation. The increase in the PPI was unsurprisingly driven by higher energy prices, particularly diesel which rose 24%. The index for final demand services rose 0.1%.
In the aftermath of the PPI report, the September Fed Funds futures see a 64% chance of a rate hike next week.
Initial Jobless Claims fell to 206,000 last week. The labor market continues to exhibit strength.
Mortgage credit availability decreased in August according to the MBA. This was driven by a decrease in cash-out refis and bank statement loans. “Credit availability decreased in August, as lenders reduced their offerings of loan programs that require flexible documentation, along with cash-out refinance loans,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Many of these loan programs had jumbo features, which contributed to the decline in jumbo credit availability. The conforming index was unchanged and remained in a narrow range as conforming lending standards and loan offerings continue to be conservative, even as mortgage rates are at their highest levels in more than a year.”
Stocks are lower as oil continues to climb. Bonds and MBS are down.
Brent crude hit $100 a barrel this morning as fighting continues in the Middle East. The US has destroyed 10 Iranian tankers while Iran is claiming to have struck two US vessels. CENTCOM is denying Iran’s claim:
“No U.S. Navy warship has been struck; all IRGC attempted attacks failed. Meanwhile, U.S. forces have successfully destroyed 10 Iranian tankers in just the last week. These vessels were part of a multibillion-dollar shadow network that funds the IRGC, and Iran cannot defend them.”
No end is in sight here, and oil / bond yields continue to work their way higher.
While the inflation indices are showing inflation ticking up, market views of inflation have not moved up in any meaningful way. The US Treasury issues Treasury Inflation Protected Securities (TIPS) which pay a lower rate but the principal increases with the Consumer Price Index. This is intended to give bondholders a way to hedge inflation risk. The difference in yield between a TIPS and Treasury bond can be used to deduce the inflation assumptions embedded in the TIPS price. This is called the breakeven inflation rate. If inflation ends up being higher, the TIPS bond is a better bet. If inflation comes in lower, the Treasury is the better bet.
The breakeven rate has been trading in a narrow range for the past several years, and you would be hard pressed to conclude that tariffs and the Iranian war have had any meaningful effect on market estimates of future inflation.
Mortgage applications fell 2.7% last week as purchases fell 3% and refis fell 2%. “Mortgage rates moved higher last week, driven by ongoing investor concerns over inflation and the federal budget deficit. The 30-year fixed rate increased to 6.85%, the highest since June 2025 and 36 basis points higher than a year ago,” said Joel Kan, CMB, MBA’s vice president and deputy chief economist. “Refinance applications remain significantly impacted by these higher rates, falling to the slowest weekly pace since May 2025. Purchase applications overall were little changed from last week, but more borrowers have shifted to using ARM loans, with the ARM share of applications at 8.5%, the highest share since June. Higher mortgage rates continue to weigh on prospective homebuyers looking to act, even as housing inventory has increased in many markets.”
The employment market is set to improve based on the Conference Board’s Employment Trend Index, which (like the Leading Economic Indicators) tends to predict future trends in the job market. “The ETI increased for a second consecutive month in August and is now up 2.0% from its level one year ago,” said Conrad Qi, Economic Data Scientist Associate, The Conference Board. “Although they were mixed in August on a month-over-month basis, all eight components of the ETI delivered positive average contributions over the past six months. This suggests support for continued job growth after nonfarm payrolls grew by 162,000 in August.”
Stocks are lower this morning as oil rises on continued fighting in the Middle East. Bonds and MBS are down.
We have a short week coming up which will be dominated by the CPI report on Friday. We will also get existing home sales and the Producer Price Index. We are in the quiet period ahead of the FOMC meeting next week, so we won’t have any Fed speakers.
The Fed is meeting next week, and the CPI report will loom large in their decision. We had a 9-3 split at the previous meeting over raising rates. On Friday, Trump told the Fed to cut rates or else he would suspend trade with any country that has a trade surplus with us.
Great jobs number just announced, breaking all estimates (except mine!) by double and triple – And you haven’t seen anything yet! EMPLOYERS ADDED 162,000 JOB IN AUGUST. Lower the interest rates because the U.S.A. is a much stronger credit than it was just a short time ago! A STRONG COUNTRY MEANS A LOWER INTEREST RATE – IT’S A BETTER CREDIT…Very simple! We should have the LOWEST RATE of any country in the World, like “the old days.” Without the United States agreeing to allow them their big surpluses, and we could stop that immediately, they would no longer be considered financially ELITE! LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT, which the U.S. Supreme Court, in its ridiculous and very costly Tariff decision, strongly acknowledged “the President” has an absolute right to do. IT’S BETTER THAN TARIFFS! The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change. High interest rates put the U.S.A. at a very unfair disadvantage, and I won’t allow that to happen! President DONALD J. TRUMP
Needless to say, the Fed had no comment on this. I am not sure how moving to autarky (i.e. becoming self-sufficient) would improve the inflation situation, and I am sure this will probably have little consideration at the Fed. Meanwhile the Fed Funds futures see a 58% chance for a hike next week. A lot will ride on the CPI.
Small business optimism fell 1.1 points in August according to the NFIB. Sales and earnings fell but were offset somewhat from a decrease in uncertainty. As an aside, I guess at some point business becomes inured to the chaos and just learns to accept it and move on.
Inflationary indicators were flat, meaning the situation isn’t improving or deteriorating. Labor fell, while credit remains relatively available. The outlook was generally good.
Labor quality / availability was listed as the single most important problem, followed by inflation and taxes. The K-shaped economy is still the biggest driver of the economy right now, with high incomes benefiting from the AI boom while the consumers on lower incomes are getting killed by high energy prices.
Consumer sentiment is low and retail sales show their lack of enthusiasm. Winners in the AI stock market surge are spending on stuff high-income people buy, but most consumers are not included in the party. Meanwhile, spending on AI is booming, creating new fixed assets including power generation, data centers, office buildings, new equipment, etc. These investments have powered the stock market and have released substantial purchasing power as investors “cash in” their success.
But back on Main Street, uncertainty remains high among owners. The Iran War lingers on with many promises that the war was about to end, but it didn’t and hasn’t. This has escalated the cost of energy which raises the price of almost everything. A third (31%) of the owners reported raising their average selling prices and as about as many plan to do so in the coming months. This will not help the Fed get inflation to its goal of 2%. Capital spending weakened, as there’s no AI boom on Main Street, yet. Uncertainty suppresses investment activity. Reducing sources of uncertainty will help bring spending back to higher levels.
Job growth is muted on Main Street and more broadly. The resumption of school will add many teachers, and the healthcare industry will continue to produce more employment. But overall, employment growth will remain modest. Construction jobs will benefit from the AI boom but overall, there will not be a surge in employment. Resolving the Iran conflict will provide a major boost to the economy, reducing uncertainty significantly and possibly reducing government spending. If the stock market realizes it is overvalued, domestic spending will slow but remain solid. Otherwise, the economy will behave much as it has for the past year.
Stocks are flattish this morning after a good jobs report. Bonds and MBS are down.
The economy added 162,000 jobs in August, which was well above the Street estimate of 55,000. The unemployment rate was steady at 4.1%. June and July payroll estimates were revised upward by 55,000 in total, turning July’s job losses back positive.
Food and drinking establishments added the most jobs while employment in IT fell. Average hourly earnings rose 0.3% MOM and 3.1% YOY. The labor force participation rate rose .2% to 61.6% and the employment-population ratio increased 0.2% to 59.1%.
In the establishment survey, it looks like the number of people employed rose by 569,000. The labor force itself increased by 683,000, which was driven by 551,000 people leaving the “not in labor force” category. This implies many long-term unemployed people found jobs last month. If so, this is an encouraging sign for the economy.
I don’t know that this changes anything for the September FOMC meeting, but the rebound in payrolls and the revision should quell any fears about the labor market weakening.
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As anyone who hedges their pipeline knows, volatility is the enemy of margin. Big moves in the markets can depress loan bids and make hedges underperform. Swaptions provide a way to buy some insurance against that risk. If you are hedging your MSR portfolio or Non-QM loans for sale, SOFR swaptions may be a good fit.
Exchange traded swaptions also have the benefit of no upfront premium, no counterparty risk, and better execution than a over-the-counter (OTC) option. In an OTC transaction, you contact a bank who will “take the other side” of your trade. So they can sell you an expensive option and then buy it back cheaply when you want to exit since they know your position (or “which way you are”). On an exchange, you will get better pricing because the counterparties are anonymous and have no knowledge about your position.
The CME has an article discussing exchange-traded SOFR swaptions, which are options on Eris SOFR Swap Futures. It is a good backgrounder on how they work, what the advantages of them are, and talks about how you don’t need to be a huge bulge bracket bank anymore to take advantage of them. Lower margin requirements are also helpful for mortgage banks who need to maintain maximum liquidity.
The article is an excellent backgrounder for those who want to learn more about how these instruments are traded. Anyone thinking about hedging non-QM and MSR positions should take a deep dive and understand the possibilities.
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Nonfarm productivity rose 1.4% last month as output increased 1.7% and hours worked rose 0.3%. Unit labor costs rose 1.2%, driven by a 2.6% increase in compensation and a 1.4% increase in productivity.
If AI is helping make us more productive, it has yet to really show up in the data:
Fed Governor Chris Waller said that he is seeing signs that inflation is beginning to move back towards the Fed’s target and if next week’s CPI report confirms it he will be inclined to hold rates steady.
“The short version is that, while inflation remains meaningfully above the Federal Open Market Committee’s (FOMC) 2 percent goal, recent data suggest we are finally seeing some signs of disinflation. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting.”
Note these things on non-market services:
“Inflation is elevated significantly above the FOMC’s 2 percent goal and has exceeded that target for five and a half years. In July, prices based on personal consumption expenditures (PCE) rose 0.2 percent, and core prices excluding food and energy increased 0.2 percent. While I was happy to see this monthly number for core inflation because it continued the pattern of lower monthly readings that we saw earlier in the year, what caught my eye in the last PCE report is that nonmarket services prices accounted for approximately half of the increase in core prices. As you are probably aware, I don’t like throwing out specific categories going into the estimate of PCE inflation, but nonmarket services prices have always been an issue for me, since they are imputed and not actual price changes.3 So, ignoring this one factor, my take is that underlying inflation is doing better than the core numbers suggest.”
“One factor that I expect will lower reported inflation a bit is a pending change in the way the Commerce Department estimates the fees paid to stock market traders and related professionals. That change in this “nonmarket” price estimate, which I expect to be made shortly, could lower 12-month PCE inflation by a few tenths of a percentage point. Given my issues with nonmarket services prices, this is a welcome measurement correction.”
FWIW, I am surprised that stock trading commissions are influencing inflation that much. Stock trading commissions have fallen to almost nothing (Robinhood is free) and algorithms are fighting for a tenth of a penny front-running these orders. The idea that something essentially free is driving inflation by a few tenths of a percentage point is baffling to me.
Waller’s comments in reference to “nonmarket services” also includes shelter inflation, which I believe has been overestimated for a while. Shelter inflation includes something called owner’s equivalent rent, which is a rental estimate for your home. Shelter inflation has been running at 3% plus for the past year:
The Case-Shiller Home Price Index has been increasing by about 1.5% annually for the past year:
Average asking rents are up about 0.5% YOY depending on the source you use. Regardless, 0.5% rental inflation and 1.5% home price appreciation are somehow translating into 3.1% shelter inflation, which implies something is off in the way BLS is calculating it.
Stocks are flattish this morning as oil continues to climb. Bonds and MBS are flat.
The economy grew modestly over the past 6 weeks according to the Fed’s Beige Book. Consumer spending grew moderately despite higher gasoline prices. The labor market continued its low hire / low fire state, while price inflation was more or less steady. Residential construction declined, however data center building offset it. As an aside, I wonder how much data center construction is drawing away skilled labor from resi construction.
Given that backdrop, it is surprising to see the Atlanta Fed’s GDP Now model predicting Q3 GDP growth at a torrid 4.8%. Note particularly the chasm between the Atlanta Fed model and the Street consensus, which sees something like 2.4%. The ISM reports are doing a lot of heavy lifting in the model.
Private residential construction spending continues to be under pressure according to the NAHB and the latest construction spending report. It fell 1.3% MOM and 7.3% YOY. Single family construction accounted for all of the decline. Blame high mortgage rates and a glut of inventory with the builders. All of the publicly-traded homebuilders reported lower gross margins, which indicates price cuts. Most builders are allocating spare capital to buying back stock instead of expanding and lot purchases.
Despite the claims of the housing advocates, there is not a shortage of homes. The builders are sitting on inventory levels that rival the glut before the 2008 housing crash:
They aren’t building more until that inventory gets worked off. Multifamily tells a similar story. Construction of 5+ unit structures during the low-interest rate post COVID years soared, especially in places like Phoenix and Austin. Average asking rents have been declining for 4 years as the new inventory gets absorbed.
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As anyone who hedges their pipeline knows, volatility is the enemy of margin. Big moves in the markets can depress loan bids and make hedges underperform. Swaptions provide a way to buy some insurance against that risk. If you are hedging your MSR portfolio or Non-QM loans for sale, SOFR swaptions may be a good fit.
Exchange traded swaptions also have the benefit of no upfront premium, no counterparty risk, and better execution than a over-the-counter (OTC) option. In an OTC transaction, you contact a bank who will “take the other side” of your trade. So they can sell you an expensive option and then buy it back cheaply when you want to exit since they know your position (or “which way you are”). On an exchange, you will get better pricing because the counterparties are anonymous and have no knowledge about your position.
The CME has an article discussing exchange-traded SOFR swaptions, which are options on Eris SOFR Swap Futures. It is a good backgrounder on how they work, what the advantages of them are, and talks about how you don’t need to be a huge bulge bracket bank anymore to take advantage of them. Lower margin requirements are also helpful for mortgage banks who need to maintain maximum liquidity.
The article is an excellent backgrounder for those who want to learn more about how these instruments are traded. Anyone thinking about hedging non-QM and MSR positions should take a deep dive and understand the possibilities.
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New York Fed President John Williams said that rising bond yields are being driven by strong economic growth, not market dysfunction. “What’s driving it, in large part, is … really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general,” he said. “So, I think it’s not really about financial conditions affecting the economy. It’s more about the economy affecting financial conditions.”
I would add that the increase in bond yields is global and not limited to the US. Japan has seen nearly a 100 basis point rise in yields year-to-date, with Europe seeing similar increases to the US.
We wouldn’t say whether he supported a hike at the September meeting. “I think that we have to wait and see. There’s no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that.”
“The [inflation] data recently have been encouraging towards that, but again we can’t just look a month or two. We’ve got to get a full picture and and look at all the … different pieces of information we have,” he added.
The September Fed Funds futures are still leaning towards a hike, with a 62% probability.
Announced job cuts rose 38% MOM but fell 38% YOY, according to the Challenger Gray and Christmas Job Cut report. This is the lowest August since 2022, and is consistent with the low hire / low fire labor market.
“This is the quietest August since 2022, but is generally on average for the month since the mid-2010s. What we’d like to see with low layoffs is an increase in hiring activity. While companies are making plans to hire more workers than last year, according to our numbers, it doesn’t appear those positions are being filled quickly,” said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.
Year-to-date, technology leads with the most announced job cuts, followed by transportation. While it is tempting to name AI as the reason for the cuts, AI is the fourth-most cited reason. Restructuring is the top one, followed by economic conditions and closings. Note that even if AI is the reason, companies will be reluctant to say that.
Surprisingly, the tech sector led in hiring, so there appears to be some churn going on as software is struggling while AI is growing.
Stocks are flattish this morning on no real news. Bonds and MBS are flat.
The private sector added 38,000 jobs in August according to the ADP Employment Report. This was below the 48,000 street estimate and the 55,000 expected for Friday’s jobs report. Education and health services added 45,000 jobs, while construction increased 12,000 and leisure / hospitality rose 16,000. Manufacturing fell, as did professional and business services.
Pay increases moderated to 3.2% from 3.3% the prior month. Job stayers were steady at 3% while job changers fell from 4.8% to 4.7%.
“Pay can tell us a lot about today’s choppy hiring. To understand hiring patterns, you have to look deeply into where pay growth is accelerating, where it’s slowing, and for whom. Once-predictable wage growth has been overtaken by the complexities of demographic change, persistent inflation, and AI’s effects on jobs.”
The ADP report is consistent with the Fed’s assessment of the labor economy: slow hire / slow fire.
The manufacturing economy decelerated in August according to the ISM Manufacturing Report. New orders and production readings declined relative to July, but remained solidly in expansion territory. Prices were flat compared to July, indicating inflation remained unchanged. “In August, U.S. manufacturing activity remained in expansion territory, though it has lost ground in a number of key measures — namely, the New Orders, Backlog and Imports indexes. Of the five subindexes that make up the PMI®, the only one that grew faster than last month was Supplier Deliveries (up 0.4 percentage point), indicating a continuing slowdown of the supply chain.
“In August, 42 percent of the comments were positive and 58 percent negative, with a 1-to-1.4 ratio of positive to negative sentiment. Pricing volatility was mentioned in 57 percent of negative comments, the Iran war 30 percent, increasing lead times 46 percent and tariffs 29 percent. (Most comments mentioned multiple factors.)
___________________________________________
As anyone who hedges their pipeline knows, volatility is the enemy of margin. Big moves in the markets can depress loan bids and make hedges underperform. Swaptions provide a way to buy some insurance against that risk. If you are hedging your MSR portfolio or Non-QM loans for sale, SOFR swaptions may be a good fit.
Exchange traded swaptions also have the benefit of no upfront premium, no counterparty risk, and better execution than a over-the-counter (OTC) option. In an OTC transaction, you contact a bank who will “take the other side” of your trade. So they can sell you an expensive option and then buy it back cheaply when you want to exit since they know your position (or “which way you are”). On an exchange, you will get better pricing because the counterparties are anonymous and have no knowledge about your position.
The CME has an article discussing exchange-traded SOFR swaptions, which are options on Eris SOFR Swap Futures. It is a good backgrounder on how they work, what the advantages of them are, and talks about how you don’t need to be a huge bulge bracket bank anymore to take advantage of them. Lower margin requirements are also helpful for mortgage banks who need to maintain maximum liquidity.
The article is an excellent backgrounder for those who want to learn more about how these instruments are traded. Anyone thinking about hedging non-QM and MSR positions should take a deep dive and understand the possibilities.
____________________________________________
Job openings fell to 7.27 million in July, which was below expectations. Health care and social assistance saw the biggest increase in openings while professional and business services saw the biggest decline. The quits rate fell from 2.0% to 1.9%. A low quits rate indicates that workers are concerned about the economy and reluctant to switch jobs.
Mortgage applications rose 0.8% last week despite mortgage rates hitting the highest level in a month. Purchase applications rose 2% while refis fell 1%. “Mortgage rates reached their highest levels in four weeks as investors’ concerns about inflation and growing deficits push yields higher across the globe,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Refinance volume dropped in response, but purchase volume increased modestly over the week and was slightly below last year’s level. In many local markets, potential buyers have plenty of homes to choose, and this is likely supporting transaction volume.”
Stocks are lower this morning as oil prices and bond yields continue to rise. So far MBS spreads are tightening to offset the move up in the 10 year.
The situation in the Strait of Hormuz continues to pressure bond yields. Fire was exchanged while one ship was hit by an unknown projectile in the Strait. Iran is urging the US to return to the June deal. Shipping traffic in the Strait of Hormuz is back down to something like 5 ships a day – a far cry from the 100 we used to see before hostilities.
The sell-off in bonds is not limited to the US – it is global. The yield on the Japanese Government Bond is 3%, and it is up almost 90 basis points this year. The 10 year is up 60. The German Bund is up close to 50, and the UK Gilt is up 60. So this sell-off is an overall rejection of sovereign debt. China’s long-term debt is holding steady, which is to be expected since they are dealing with the aftermath of a real estate bubble.
MBS spreads and corporate bond spreads are narrowing, which means that yields are rising on these products as well, just not as much as the 10-year. This is a good sign for the economy overall – it means that it is handling higher rates well.
Meanwhile, Trump is meeting with the CEOs of the big refiners to see if there is a way to expand capacity and push down gasoline prices. Note West Coast refiners are dealing with onerous state regulations in CA and WA which is pushing them to leave these markets. The deal with Venezuela to increase production could help, but ultimately crack spreads march to their own drummer. Venezuelan production has been depressed for years, and the hope is that the US can help it get back to normalcy.
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As anyone who hedges their pipeline knows, volatility is the enemy of margin. Big moves in the markets can depress loan bids and make hedges underperform. Swaptions provide a way to buy some insurance against that risk. If you are hedging your MSR portfolio or Non-QM loans for sale, SOFR swaptions may be a good fit.
Exchange traded swaptions also have the benefit of no upfront premium, no counterparty risk, and better execution than a over-the-counter (OTC) option. In an OTC transaction, you contact a bank who will “take the other side” of your trade. So they can sell you an expensive option and then buy it back cheaply when you want to exit since they know your position (or “which way you are”). On an exchange, you will get better pricing because the counterparties are anonymous and have no knowledge about your position.
The CME has an article discussing exchange-traded SOFR swaptions, which are options on Eris SOFR Swap Futures. It is a good backgrounder on how they work, what the advantages of them are, and talks about how you don’t need to be a huge bulge bracket bank anymore to take advantage of them. Lower margin requirements are also helpful for mortgage banks who need to maintain maximum liquidity.
The article is an excellent backgrounder for those who want to learn more about how these instruments are traded. Anyone thinking about hedging non-QM and MSR positions should take a deep dive and understand the possibilities.
_________________________________________
Kevin Warsh’s comments at Jackson Hole have bumped up the odds for a rate hike at the 15-16 September meeting. The odds currently stand at 67% for a 25 basis point hike and 33% for no change. We will get this Friday’s jobs report and next week’s CPI report before the meeting. If Friday’s jobs report shows a rebound after July’s disappointing 23,000 drop (or that number is revised upward), expect the futures to price in a bigger chance of a hike.
Foreclosures starts picked up in July to 39,906 which is up 10% on a year-over-year basis. “The increase in foreclosure starts and completed foreclosures compared to last year shows that financial pressures remain a factor for some homeowners,” said Rob Barber, CEO at ATTOM. “However, the broader context is important. Foreclosure activity remains relatively low by historical standards. While annual increases have become more common, current volumes indicate that the market remains relatively resilient overall.”
Texas, Florida, and California had the biggest increase in starts.
Interesting chart: Stocks have outperformed bonds by the most since the Kennedy Administration. Either stocks are wildly overvalued or bonds are wildly undervalued. I’ll let you guess which one is the case.
Stocks are lower this morning as oil rises. Bonds and MBS are down.
Iran and the US exchanged strikes over the weekend, with Trump threatening Kharg Island which is Iran’s primary export hub. Hitting Kharg Island would be a major escalation and would undoubtedly move oil prices much higher.
The week ahead will be dominated by the jobs report on Friday. Aside from jobs, we will get ISM data and construction spending. Earnings season is largely over, and profits were strong, helped out by tariff refunds.
Kevin Warsh spoke at Jackson Hole on Friday. Here are his prepared remarks.
On the subject of decreasing communication from the Fed:
Transparency in communications about future policy decisions is not a virtue unto itself. Communications must be in service to the Fed’s paramount responsibility: getting monetary policy right.5
Forward guidance as a regular practice was adopted by my colleagues and me during the Global Financial Crisis.6 It was essential at the time, and we introduced it with much fanfare. But, as with other legacies of crises past, I believe that the practice has overstayed its welcome.
The Fed should be humble and never naïve. The Fed plays an essential role in the economy and the markets. And our tools are powerful. We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.
The economic literature has long described the distorting effects: a hall-of-mirrors problem.8 If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments . . . more likely to be caught unprepared for a turn of events . . . and more likely to commit errors in policymaking.9
The key point is that providing guidance can have the opposite of the intended effect. The Fed talks, markets move and the Fed reacts to the market move. Forward guidance was something that made sense in the aftermath of the burst residential real estate bubble when deflation was a clear risk. That is no longer the case, and the Fed is returning to normalcy.
On the economy:
For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened. One indicator of strength is how well an economy holds up to shocks. On that score, both Main Street and Wall Street have been remarkably resilient.
Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.
Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices. To try to gauge underlying inflation, I find it instructive to disaggregate the 199 individual components of the PCE price measure. Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. This is well below the post-pandemic highs of about 77 percent, but it remains well above the level of 32 percent in the two decades that preceded the pandemic.
Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep.
The markets interpreted his comments as hawkish and bumped up their chance of a rate hike at the September meeting. The comment that policy is not restrictive currently is sending signals that the Fed’s estimate of r-star (the neutral interest rate) is too low. You cannot estimate r-star directly, but the March projections have it at 3.1%.
If policy is not restrictive at a range of 3.5% – 3.75%, it implies we are at r-star.
Consumer sentiment remained depressed in August according to the University of Michigan Consumer Sentiment Survey. Sentiment declined 6% MOM and is down 11% on a YOY basis. Sentiment fell across groups. Year-ahead inflation expectations decreased from 4.2% to 4.0% and longer-run expectations were unchanged at 3.3%.
Stocks are flattish this morning as we await Kevin Warsh’s speech at Jackson Hole. Bonds and MBS are down.
Kevin Warsh is expected to speak today at Jackson Hole at 10:00 am EST. Given the Fed’s new direction of less communication it is hard to predict what he will say. Obviously the market is looking for direction regarding the level of interest rates but Warsh is probably going to play things close to the vest and speak in generalities: inflation is too high but we think it is going to come back down, we are prepared to raise rates if necessary, the overall economy is strong, the labor market is robust and monetary policy is in a good place while we wait and see how things unfold. No, I am not going to talk about Treasury’s repurchase program and long term bond yields which are set by the market.
Boston Fed President Susan Collins said that she is open to hiking rates if inflation doesn’t move lower: “I am open to supporting an increase if I see conditions as not providing that evidence of continued disinflation that I’m looking for,” Boston Fed President Susan Collins said in an interview on the sidelines of the Kansas City Fed’s annual symposium in Wyoming.
She was also asked about Treasury’s buyback program and declined to comment.
Separately, Cleveland Fed President Beth Hammack said now is the time to act on inflation: “I don’t want to prejudge anything. But I believe now is the time to act,” she said in a live CNBC interview from the Fed’s annual symposium in Jackson Hole, Wyoming. “I believe that we’ve been in an inflationary situation for more than five years. It’s been running well above our target. I don’t see any restriction in policy when I look at financial conditions and when I talk to market participants.”
“The longer inflation stays above our objective, the harder it will be for us to bring it back down, and the more pain that individuals and businesses are going to be experiencing,” she said. “To me, the real problem with us missing on our inflation objective for so long is the risk that an inflationary mindset starts to set in with the public.”
The “I don’t see any restriction in policy” means she thinks policy is neutral, and the natural non-inflationary rate of interest (r-star) is more or less in the mid-to-high 3% range, not 3% which is sort of where the consensus is.
The national median apartment rent rose 0.1% in August, however it is still down 0.8% on a year-over-year basis. The national median rent is $1,390 per month and has experienced annual declines for the past 3 years:
Given that home prices are rising modestly and apartment rental growth is negative shelter should be a drag on inflation, not a support for it. Something seems odd in the way the government is calculating owner equivalent rent.
The multifamily vacancy rate ticked down to 7.1% and list-to-lease times are 32 days. San Francisco and San Jose are seeing big increases in rents (think AI boom) while the Sun Belt is seeing declines.
New listings hit a 4-month high, according to Redfin, giving buyers more negotiating power. “Buyers have an opportunity to get a deal done before the market potentially picks back up after Labor Day,” said Chen Zhao, Redfin’s head of economics research. “House hunters should consider homes that have been listed for several weeks; sellers of those homes may be willing to accept an offer under asking price, provide concessions like a mortgage-rate buydown or make repairs based on an inspection. Sellers should resist the urge to price based on what a neighbor got a year or two ago: Pricing a home correctly from the start can be the difference between attracting a serious buyer and lingering on the market.”
Stocks are higher this morning after good numbers out of Nvidia. Bonds and MBS are down small.
The Fed’s Jackson Hole Symposium begins today with Kevin Warsh slated to speak tomorrow. These meetings tend to have a lot of press questions which will be interesting given Warsh’s preference for cutting down on the communication. Treasury Secretary Scott Bessent’s version of Operation Twist (where Treasury is buying back longer-dated bonds to push down long-term rates) will almost certainly be asked and it is a delicate question for Warsh. Generally speaking the Fed and Treasury stay in their respective lanes, where Treasury doesn’t comment on the Fed Funds rate and the Fed doesn’t comment on the US dollar.
Bessent is not only fighting the US’s large debt burden, he is fighting a general bear market in global sovereign debt. Global sovereigns tend to correlate and yields have risen across the board.
The second revision to Q2 GDP was unchanged at 1.5%. Consumption was increased from 3.2% to 3.4%. The PCE Price Index was revised upward as well. Consumption contributed 2.3% to GDP growth while investment added .5%. The trade balance deducted 1.1% and government spending was a drag of 0.2%.
In other economic news, durable goods orders rose 1.1% in July, which beat the 0.5% estimate. Ex-transports they rose 0.4%. Interestingly, CAPEX rose only 0.2%, which is surprising given the data center buildout.
Richmond Fed President Thomas Barkin described the US economy as the tenth round of a boxing match with both fighters still standing. He is referring to the economy’s ability to withstand shock after shock, from tariffs to the Iranian war, to rising energy prices.
He compares the AI buildout to the railroad investments during the Gilded Age. Interestingly the Gilded Age also featured a huge increase in inequality which is a hot button issue nowadays.
Mortgage applications fell 1% last week as purchases fell 0.3% and refis dropped 2%. “Mortgage rates reached their highest level in three weeks, with the 30-year fixed rate up slightly to 6.78 percent. Mortgage rates have increased around 20 basis points over the past two months, which has dampened refinancing activity,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Refinance applications decreased, particularly for FHA and VA loans, and the average loan size for refinances was at its lowest since June 2025.” Added Kan, “Similarly, purchase activity was down over the week, driven by a 7 percent decrease in FHA applications. The purchase market has also slowed these past two months, with applications now 5 percent behind last year’s pace.”
Chris Whalen of the Institutional Risk Analyst had an interesting tidbit about Fannie repurchases. What do you think the biggest driver of Fannie repurchases is? Gotta be appraisal issues, right? It isn’t.
Some 80% of repurchase demands are due to missing PMI. Given that GSE and Federal regs require PMI at origination, this seems odd. It sounds like a lot of borrowers are canceling PMI once the LTV drops below the threshold. Since home prices are actually declining in a lot of MSAs (particularly in Florida and out West) some of those homes that let PMI lapse might need it again. Of all the things that can go wrong in a GSE purchase, PMI generally doesn’t leap to the top of the list the way occupancy or income fraud does.
Speaking of fraud, he also mentioned a common DSCR fraud where the borrower puts the title in a LLC and then “rents” from the LLC, effectively turning an investment property into a primary.
Mortgage delinquencies fell 16 basis points to 3.39% according to the ICE First Look. “July’s data provided another indication that mortgage performance may be finding firmer footing beneath the surface,” said Andy Walden, Head of Mortgage and Housing Market Research for ICE. “While the national delinquency rate and serious delinquency inventory declined, the more telling trend is that new default activity has eased from last year’s levels in four of the past five months, and cure activity is improving.”
Now that home price appreciation appears to be settling down from its protracted deceleration performance may be picking up.
