The Daily Tearsheet

Stocks are lower this morning on no real news. Bonds and MBS are flat.

The economy added 172,000 jobs in May according to the BLS. This was well above Street expectations of 85,000. The unemployment rate was steady at 4.3%. The labor force participation rate was steady at 61.8%, while the employment-population ration inched up. Average weekly earnings were up 3.4%, in line with expectations. The number of people unemployed fell 66k, of which 17k exited the workforce and the remainder got jobs.

It appears that the low hire / low fire environment might be improving.

Nonfarm productivity rose 0.3% in the first quarter as output rose 1% and hours worked rose 0.7%. Unit labor costs rose 1.8%. San Francisco Fed President Mary Daly said that evidence of productivity is everywhere, but it has yet to really show up in the data.

“Productivity growth is everywhere except in the data,” said San Francisco Federal Reserve Bank President Mary Daly while speaking about the impacts of artificial intelligence.

“It’s business process change that generates sustained productivity gains, and firms are just at the early stages of interrogating, learning the technology, using the technology, and then thinking, how do I change my business so it doesn’t actually look the way it once did,” she said.

“Think of electrification. We had electricity for a long time before we got the rapid productivity growth that came from electrification,” said Daly. There will be a S curve for productivity as AI continues to develop.

Speaking of AI and productivity, announced job cuts rose 16% in May to 97,006 according to outplacement firm Challenger, Gray and Christmas. This is the highest May since 2020. “On top of the headline AI story, we’re seeing a sharp rise in cuts tied to acquisitions and mergers and a jump in bankruptcy-related losses, which tells me companies are restructuring aggressively as they reposition for an AI-driven economy,” said Andy Challenger, labor and workplace expert and chief revenue officer of Challenger, Gray & Christmas.

“The labor market is being reshaped by technology in real time. AI is now the leading reason companies give for cutting jobs and the primary industry citing it is Technology. Technology, already the year’s biggest job cutter, saw its steepest month of cuts since early 2023, even as it remains the sector with the most hiring plans this year,” said Challenger.

Stocks are lower this morning after disappointing numbers from Broadcom. Bonds and MBS are flat.

The services economy improved in May according to the ISM Services Report. The index improved from 53.5 to 54.5, driven by a jump in new orders and inventory build. The employment index contracted. The inventories index increased markedly and prices rose as well. This is similar to what we saw in the ISM Manufacturing Report- companies are building inventory presumably to get ahead of price increases.

“Business activity hit its second highest reading since achieving the same reading of 57.7 percent in October 2024, and the New Orders and Supplier Deliveries indexes hit their third highest readings in that time frame. The Employment index, however, hit its second lowest reading since September 2025, 0.5 percentage point below its 12-month average. Respondents commented frequently that their companies had instituted hiring freezes or were not backfilling vacated positions, however, most industries reported that they were holding flat in employment month over month. Respondents reporting that new orders were higher than last month most frequently attributed this to seasonality.

The economy grew at a “slight-to-moderate” pace in the past 6 weeks according to the Fed’s Beige Book. They noted that consumer spending is following the K-shaped recovery, where the higher incomes are doing well and the lower half is struggling.

As we saw in the ISM data, manufacturing is strong. Not sure how much of that is companies trying to get ahead of inflation, suppliers switching to domestic manufacturers or data center capital expenditures. Regardless, it is a welcome development.

Employment remained flat, with increased hiring noted in manufacturing. Wage growth was in line with inflation. The labor market remains in a low hire / low fire state. Prices increased at a “moderate to strong” pace noting that energy costs due to the Iran situation are spilling over into packaging, fertilizer and food.

Home sellers are pulling their homes off the market at the fastest pace since 2020, according to Redfin. Nearly 5.8% of listings were taken off as buyers balk at high home prices and rising mortgage rates. “Sellers are still getting used to the post-pandemic normal,” said Patricia Ammann, a Redfin Premier agent in Arlington, VA. “Prices aren’t soaring like they were five years ago–high gas prices and the rising cost of living overall is trickling down to the housing market, making buyers much less likely to bid prices up. Buyers know they have negotiating power, often offering under the asking price and completing inspections, but some sellers just won’t budge.”

The private equity / SaaS blowup is not over. It is early June and many of these funds permit quarterly redemptions. We are seeing several put up gates, which limit how much an investor can withdraw. Partners Group, a Swiss PE firm just put up gates, and we have seen credit funds do the same. This seems to be relatively contained, but it is worth watching as many of the funds that buy non-QM paper swim in the same waters as these PE funds and credit problems have a habit of showing up in strange places.

Stocks are lower this morning as the US and Iran exchange fire. Bonds and MBS are down.

Job openings increased to 7.6 million in April, according to the JOLTs job openings report. This is an increase of 731,000. Most of the increase was attributable to a 668,000 increase in professional and business service jobs. Health care and social assistance also increased. The increase in professional and business service jobs is interesting because that sector should be ground zero for AI job losses.

The report was still a mixed bag however. Total hires in April fell by about 400k and the quits rate dipped from 2% to 1.9%.

The private sector added 122,000 jobs in May, according to ADP. Trade, Transportation and Utilities added 36,000 jobs, while professional and business services added 11,000. IT and natural resources fell. “Hiring was more broad-based in May than we’ve seen in the last few years. The labor market continues to show sustained momentum going into the summer hiring season.”

Cleveland Fed President Beth Hammack said the Fed might need to act if inflation doesn’t start falling. “There’s a growing risk that inflation could remain elevated if energy costs do not come down quickly and if businesses feel they have no choice but to raise prices,” Hammack said. “This would be a bad development.”

“Based on the data, I’m more concerned about the growing risks of persistently elevated inflation than the risks to full employment, and that monetary policy may not be sufficiently restrictive to bring inflation down to 2%.”

“It’s not just oil; it’s not just tariffs. It’s health insurance; it’s broader energy prices. There are a lot of underlying material costs, so I’m seeing it in a lot of different places, and that’s what I need to focus on.”

Bill Pulte is has been named to the Director of National Intelligence, replacing Tulsi Gabbard who is resigning. He will supposedly remain in charge of FHFA, but this probably isn’t a good development for those who were hoping for Fannie and Freddie to be released. Pulte is a housing guy, so I’m not sure what he knows about national security. Needless to say, Democrats are nonplussed, remembering his investigation of Fed Governor Lisa Cook over occupancy fraud.

Mortgage applications fell 2.5% last week as purchases fell 3% and refis fell 2%. “The prospect of easing energy prices given the evolving situation in the Middle East brought mortgage rates slightly lower last week. The retreat in rates, however, did not lead to an increase in mortgage applications,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Purchase applications remained ahead of 2025’s pace but were at its slowest weekly pace since April, and refinance activity was at its weakest since last June.”

Stocks are lower this morning on no real news. Bonds and MBS are up.

The manufacturing economy improved in May, with the ISM Manufacturing Index rising 1.3 points to 54. New orders expanded for the fifth straight month, while production increased as well. Prices remain elevated, however the are going in the right direction. Employment improved, although it is still in contraction mode.

“In May, U.S. manufacturing activity remained in expansion territory, growing at a faster pace compared to the month before. Of the five subindexes that make up the PMI^®, the New Orders index indicated faster growth compared to the previous month, the Supplier Deliveries index stayed the same, the Production Index grew at a faster rate, and the Employment and Inventories indexes remained in contraction, though both improved.

“In May, 25 percent of the comments were positive and 69 percent negative, with a 1-to-2.7 ratio of positive to negative sentiment. Among comments, the Iran war was mentioned in 42 percent and tariffs in 18 percent; 57 percent of the panelists mentioned pricing volatility as an issue for their companies.”

Construction spending rose 0.4% MOM and 0.9% YOY according to the Census Bureau. Overall private residential construction rose 0.8% MOM and 1.7% YOY. Single-family increased 1.4% MOM but fell 1.9% YOY. On the other hand multifamily fell 0.3% MOM but rose 1.1% YOY.

S&P’s Manufacturing PMI confirmed what the ISM data said: that manufacturing is improving. Output growth rose to the fastest rate in 4 years. That said, we might be seeing the beginning of inflationary expectations feeding into the economy as manufacturers are stocking inventory.

“The headline PMI has hit a four-year high, with strong factory production growth for a second successive month in response to a further marked upturn in order books, but since the outbreak of war in the Middle East we have seen production and demand buoyed by stock building as companies worry over rising prices an
supply difficulties.

“This stockpiling was again widely evident in May and makes it hard to take an accurate reading on the underlying health of the manufacturing economy, as growth will cool once this stock build has run its course.

“The incidence of supply chain delays is the highest since August 2022, with the buying of safety stocks not only adding to the supply squeeze from the closure of the Strait of Hormuz but also pushing prices higher for a wide variety of inputs. The resulting steep jump in producer costs sends a worrying signal that broader economy inflation has further to rise in the coming months.”

When the Fed talks about “inflationary expectations remaining well-anchored” what they mean is that inflation expectations are not driving behavior. That seems to be changing at least according to this report. If companies begin to front-load purchases in order to beat expected price increases, this can exacerbate inflation. While it doesn’t seem to be happening yet on the employment side, the behavior of manufacturers implies that this is getting embedded into the economy. The big question is whether this is a temporary phenomenon related to the situation in the Persian Gulf or it is something more permanent.

I wouldn’t read too much into one single report, however it does confirm what the Fed is concerned about. The bigger concern would be a wage – price spiral where inflation rises and workers demand higher compensation, which increases costs and drives inflation even higher. This is the classic wage-price spiral and that was a common phenomenon in the 1960s and 1970s.

The low hire / low fire labor market doesn’t appear to be conducive for big wage increases, especially as AI threatens to eliminate many jobs. That said, this bears watching and has the potential to push the Fed towards a more hawkish stance. The December Fed Funds futures agree, with markets predicting a 50-50 chance of a rate hike this year.

Stocks are higher despite new attacks in the Strait of Hormuz. Bonds and MBS are up.

The week ahead will be dominated by the jobs report on Friday. We will also get ISM data and construction spending. We will also have speeches from Beth Hammack, Neel Kashkari, Michael Barr and Tom Barkin.

The US Navy is quietly guiding ships through the Strait of Hormuz. The Navy is having the ships “go EMCON” or not transmit data during the passage, which is meant to not tip off the Iranians that someone is coming through. This makes it more difficult for shipping trackers to know who is coming through. Regardless, this should help increase petroleum supplies for the rest of the world and put additional pressure on oil prices.

“Though U.S. forces are not escorting, we continue to communicate and coordinate with commercial ships seeking to freely and safely transit the Strait of Hormuz, a critical international corridor for regional and global economies,” Capt. Tim Hawkins, a Central Command spokesman, said in a statement on Saturday.

Berkshire Hathaway is buying homebuilder Taylor Morrison for $6.8 billion in cash. The $72.50 price works out to be a 24% premium to Friday’s closing price. The homebuilders have gone nowhere for the past year as hopes of lower rates have been dashed.

Below is a chart of the S&P SPDR homebuilder ETF. The builders are an early stage cyclical – the type of stock that performs best when the economy is coming out of a recession. Given that the homebuilders are sitting on a glut of inventory, it is an odd time to buy one.

Berkshire is paying 11.3x expected 2027 earnings, which isn’t an unreasonable multiple given that gross margins for the sector are on the low side as builders cut prices to move the merchandise.

Rent prices continue to climb, despite rising interest rates and flatlining real estate prices. The median asking rent rose 4.5% in the fourth quarter compared to a year ago.

Stocks are flattish this morning on no real news. Bonds and MBS are flat.

The US and Iran have reached a tentative deal to extend the ceasefire for 60 days. Of course there have been missile launches etc during the current ceasefire, so take that how you will. Regardless, oil prices continue to work their way lower and bonds yields are falling slightly.

New home sales fell 6% MOM and 12% YOY to a seasonally adjusted annual rate of 622,000. The median home price rose 8% to $422,500. This is up about 2.2% compared to a year ago. The inventory of unsold homes rose 2% to 489k, which represents a 9.4 month supply. This indicates a buyer’s market and is backed up by declining gross margins for the builders.

First quarter GDP was revised downward from 2.0% to 1.6% as investment and consumer spending estimates fell. Separately, durable goods orders rose 8%, which was well above expectations. Capital goods orders fell 1%.

Affordability fell in April, according to the MBA. The median mortgage application payment increased from $2,131 to $2,152. “Housing affordability conditions weakened slightly in April, as mortgage rates edged higher and rising loan amounts pushed monthly payments up from March. However, affordability remains improved compared to a year ago, supported by lower mortgage rates and continued income growth,” said Edward Seiler, MBA’s Associate Vice President of Housing Economics and Executive Director of the Research Institute for Housing America. “Looking ahead, continued income gains and some stabilization in mortgage rates could help support better affordability conditions.”

The Purchase Applications Payment Index has been rebounding (affordability getting worse) as rates rise in response to the situation in Iran

Fair housing groups are suing the CFPB over its discarding of the disparate impact rule regarding lending discrimination. The disparate impact rule says that intent is irrelevant with respect to lending discrimination. If your numbers don’t precisely reflect the demographic makeup of your geographic area, you are guilty of discrimination, no questions asked.

Of course if you torture the data enough, you can get it to confess to anything, and with today’s data mining techniques if a regulator wants to find an anomaly, they will. And since fines tend to get recycled into forced donations to activist groups they are unhappy about the loss of a source of revenue. “This is the deliberate dismantling of 50 years of legal jurisprudence, regulatory guidance, and bipartisan consensus that lending discrimination has no place in America,” Lisa Rice, the CEO and president of the National Fair Housing Alliance, one of the plaintiffs that filed the lawsuit, said in a statement.

Of course no one is advocating for lending discrimination, but it is an acknowledgement that things have changed in the past 50 years and the whole concept has probably become irrelevant in the age of “push button, get mortgage.”

Stocks are lower this morning after the US conducted some additional strikes on Iran. Bonds and MBS are down small.

Personal incomes were flat in April, according to the Bureau of Economic Analysis. Personal consumption expenditures (i.e. spending) rose 0.5%. The PCE Price index decelerated to 0.4% MOM from 0.7% in March. This was better than expectations. Ex food and energy, the index rose 0.2%, again below expectations. YOY numbers were 3.8% on the headline and 3.2% on the core.

Chicago Fed President Austan Goolsbee said that energy inflation has been persistent and represents a potential stagflationary shock for Asian economies. Given that China is still in the very early stages of dealing with a burst real estate bubble, that gives them an incentive to tell Iran to knock it off and re-open the Strait of Hormuz.

Separately, he said he didn’t regret his dissenting vote at the last Fed meeting and worries about AI investment and the stock market creating artificial wealth that fuels excessive consumer spending. “I want people to just pay attention to, are you seeing big increases in consumer spending fueled by stock market wealth increases? Are you seeing data center investment driving up the cost of electricity of construction workers and having this short-run impact upon inflation in the U.S.?”

Ultimately, AI should be a productivity-enhancing phenomenon which raises the speed limit of the economy. In other words it should allow the economy to grow faster while containing inflation. But in the short term, the chip stocks are headed to the moon, and AI data center construction is consuming resources.

Minneapolis Fed President Neel Kashkari said that the inflation fight takes precedence over the labor market. “I am focusing heavily on inflation. I’m not ignoring at all the labor market. We need to pay attention to both sides, but the labor market is in decent shape right now, while inflation is simply much too high,” he said.

Inflationary expectations are increasing, at least according to some of the consumer sentiment surveys like the University of Michigan Consumer Sentiment Index. If inflationary expectations become embedded into the economy and start to drive behavior, it could cause the Fed to act more aggressively. “If that were to happen, then we’d have to respond even more aggressively, so we’re much better off doing what we need to do to keep inflation expectations anchored.”

University of Michigan Inflation expectations:

All-cash purchases declined to 29% in March, according to research from Redfin. All-cash purchases peaked at 35% in 2023, largely because mortgage rates were elevated during that time. Even though the 10 year bond has been relatively steady over the past year, mortgage spreads (i.e. the difference between the mortgage rate and the 10 year treasury) have fallen. Add to that the increasing uncertainty overall over the past year or two (tariffs, Iran) and investors are reluctant to commit that much cash. The outsized home price appreciation we saw during 2022-2023 is also over and real estate prices are flattish on a YOY basis. This tends to draw speculative money out of the system.

All-cash purchases were most prevalent in Cleveland and West Palm. Florida was ground zero of the real estate gold rush during COVID, then it went through a decline due to expensive HOA assessments and insurance worries. The Rust Belt never experienced much of a rally after the bubble burst but is now becoming attractive to buyers who have been priced out elsewhere.

Stocks are higher this morning as oil continues to fall. Bonds and MBS are up.

Home prices rose 0.7% YOY in March according to the Case-Shiller Home Price Index. More than half of the US major metros reported declines. The hip to be square trade continues with Chicago as the lead sled dog and Western MSAs like Seattle and Denver bringing up the rear. “Monthly price movements offered a seasonal spring lift but little underlying momentum. Before seasonal adjustment, the National Index climbed 0.7% from February, and even double-digit composite markets like the 10-City and 20-City posted strong March gains (1.2% and 1.0% NSA, respectively). Yet after seasonal adjustment, the National and 20-City indices both slipped 0.2%, and the 10-City ticked down 0.03%, confirming that demand remains soft as we head into spring. The latest six months saw only a negligible 0.3% rise in national home prices, barely keeping pace with the 0.3% in the prior half-year – a sign of a housing market nearly at a standstill.

“Mortgage rates, meanwhile, have resumed climbing. The 30-year fixed rate dipped below 6% in late February but rebounded to roughly 6.4% by the end of March, re-intensifying the affordability squeeze on buyers and potentially further damping home sales and price growth,” Godec concluded.

Separately, the FHFA House Price Index rose 0.1% MOM and 1.7%. The FHFA index only looks at conforming loans, so this is an indication of better appreciation at the lower price points.

Mortgage applications fell 8.5% last week as purchases fell 0.4% and refis fell 18%. There were large declines in applications across loan types – conventional refinances were down 14%, along with an 18% decrease for FHA applications and a 34% decrease for VA applications. Overall, refinance applications accounted for 38% of applications, the lowest share since June 2025.”

Added Kan, “Purchase applications were slightly lower across all loan types but still ran at a stronger pace than last year’s pace. The average loan size for a purchase application reached another survey high at $473,600, as borrowers with smaller loan sizes were less active given the higher rate environment and its negative impact on their purchasing power.”

Consumer confidence worked its way lower in May according to the Conference Board. “Consumer confidence edged downward in May as the inflationary impacts of the war in the Middle East intensified,” said Dana M Peterson, Chief Economist, The Conference Board. “Consumer appraisals of current business conditions and the current labor market were moderately less positive compared to last month. This was somewhat offset by modest improvements in consumers’ expectations for business conditions and the labor market six months from now. Meanwhile, income expectations eased in May, as those anticipating less income rose.”

Inflation expectations declined

Stocks are higher this morning as oil prices fall on optimism for a resolution in Iran. Bonds and MBS are up smartly.

The week ahead will contain the personal incomes and outlays report, which includes the PCE Price Index, which is the Fed’s preferred measure of inflation. We will also get home price indices from Case-Shiller and FHFA.

Consumer sentiment fell in May, according to the University of Michigan Consumer Sentiment Survey. These consumer surveys are often inverse gasoline price indices, so it isn’t surprising to see the index fall.

Inflation expectations rose to 4.8% from 4.7% and longer run expectations rose from 3.5% to 3.9%. The increase in long-term expectations will be a worry for the Fed. You hear the phrase “inflationary expectations are well-anchored.” That means that inflation expectations are not yet affecting behavior. This behavior includes front-loading supply orders to get ahead of price hikes and employees negotiating bigger raises. So far, we aren’t seeing this behavior (certainly not in the labor market), but it is a possibility for businesses, especially in energy. Relief is probably on the way however as the more and more wells that were drilled during the last energy spike (2005 or so) become economic and begin production.

“Consumer sentiment fell for the third straight month as supply disruptions in the Strait of Hormuz continue to boost gasoline prices. Sentiment is now just below the previous historical trough seen in June 2022. The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month. Lower-income consumers and those without college degrees posted particularly strong sentiment declines; these groups are more sensitive to increases in the cost of gas and other essentials. Independents and Republicans saw decreases in sentiment, with both groups reaching their lowest readings of the current presidential administration. Meanwhile, sentiment of Democrats was little changed from last month. Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.”

The index of leading economic indicators improved in April, according to the Conference Board. “The US LEI increased slightly in April, driven mainly by a rebound in stock prices and an increase in building permits, only for two and more units,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The leading index rose in two of the past three months, but the gains did not offset the steep fall registered in March. As a result, the LEI’s six- and twelve-month growth rates were negative, signaling fragile economic conditions ahead. Strong investment in AI infrastructure, data centers, and energy production likely will have a positive impact on growth and sustain business spending, but may only partially offset weakness on the consumer side. Higher gasoline and energy costs—paired with weak hiring—will likely erode household purchasing power in the months ahead, particularly for lower- and middle-income consumers. The Conference Board is currently projecting 1.7% y/y GDP growth in 2026, revised up slightly from last update of 1.6%.”

Stocks are higher this morning on no real news. Bonds and MBS are up small.

The bond market closes early ahead of the Memorial Day weekend. It should be a relatively dull day as most of the Street will be on the LIE by noon.

Kevin Warsh is set to take over the reins of the Fed today. Trump nominated him in hopes for lower rates, but the handicapping is that the next move is a hike, not a cut.

Housing starts fell 2.8% MOM to a seasonally adjusted annual rate of 1.47 million units. This was up 4.6% compared to a year ago. Building permits rose 4.8% MOM to 1.44 million. Despite higher rates, housing starts and building permits seem to be holding up.

We saw a big jump in multifamily starts, while single-family starts fell. We know builders are sitting on a lot of SFR inventory, so the drop in 1 units does make sense. Multi-fam starts had been declining for a while so this might just be a blip.

Business activity held up in May according the Flash S&P PMI. Manufacturing growth was at least partially attributable to stock-building due to the situation in Iran. Input costs rose at the fastest rate since 2022.

“The damaging economic impact from the war in the Middle East is becoming increasingly evident in the business surveys. The ‘flash’ PMI data for May recorded only modest growth of business activity as demand was again squeezed by a further spike in prices and jobs were cut as firms worried over rising costs and the economic outlook.

“Coming on the heels of a subdued April reading, the May PMI indicates that the economy will struggle to manage annualized GDP growth of much more than 1% in the second quarter. However, even this subdued pace of growth may not last. On average, over the past three months order book growth has slowed to its weakest for two years, and a boost from precautionary stock building due to concerns over further price hikes and supply delays will not last forever.

“Demand also looks set to cool further in response to rising prices. Firms’ costs have jumped higher at a pace not seen since the energy price shock of 2022 and are being passed on to customers in the form of sharply higher selling prices. The survey price gauges therefore indicate that inflation looks set to rise further just as the economy cools.”