The Daily Tearsheet

Stocks are higher this morning despite higher rates and oil prices. Bonds and MBS are down.

The week ahead is relatively data-light with only new home sales and leading indicators on the agenda. We are in the quiet period ahead of the Fed’s July meeting, so there won’t be any Fed speakers either.

Earnings season has begun and next week we will hear from agency mortgage REITs AGNC Investment and Annaly, homebuilders D.R. Horton, PulteGroup, NVR and Taylor Morrison, Western Alliance, and market bellwethers Google and Tesla.

Consumer sentiment moved sharply higher in July, according to the University of Michigan Consumer Sentiment Survey. The index rose 10% to reach the highest level since February. Declining gasoline costs were a big reason for the move.

“This month’s rise in sentiment was pervasive across the population, seen across groups by age, income, wealth, and political party. Particularly strong increases were seen among consumers without a bachelor’s degree. However, with prices remaining frustratingly high, consumers are hardly ebullient about the economy; sentiment is down 12% from a year ago. Thus, sentiment’s upward momentum may prove difficult to sustain if recent declines in gas prices continue to reverse course. Interviews for this release spanned June 23 to July 13, with more than 70% completed before the resumption of US strikes against Iran on July 7 and the subsequent increase in gas prices.”

Near-term inflationary expectations declined but remain elevated. Longer-term inflationary expectations were flat.

Industrial production rose 0.1% last month, while manufacturing production was flat. Capacity Utilization fell.

Federal Reserve Vice Chairman Philip Jefferson spoke at Stanford on Friday. He made some interesting points regarding AI and its potential effects on interest rates. The most surprising was his view that AI would increase r-star (or the long-term rate of interest). You would think AI would drive up productivity, thus lowering inflationary pressures and allowing r-star to fall. Productivity increases allow the speed limit of the economy to increase (basically increases non-inflationary potential output) so therefore it should be bearish for inflation and also allow lower rates.

A related consideration is the potential effect of AI on the longer-run neutral rate of interest. Often called r*, this is the real interest rate consistent with the economy operating at its full potential once all shocks have dissipated. If AI leads to permanently higher levels of productivity growth, it may increase firms’ desire to invest and, hence, their demand for funding. Higher productivity growth may also discourage household savings by increasing expected future income. Under these circumstances, to reconcile the increase in investment with reduced savings, r* would likely rise. However, predicting changes in the neutral rate is challenging, given the historically noisy relationship between productivity growth and real interest rates. Furthermore, potential AI-induced increases in inequality could have mitigating effects on r*. High-income households tend to save at higher rates than low-income households. Thus, a rise in income inequality could lead to an increase in the supply of savings, putting downward pressure on the neutral rate.⁶

On monetary policy, he warned about inflation and the potential for higher rates going forward:

At our last meeting, in June, the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent. This policy stance should continue to support the labor market while allowing inflation to resume its decline toward our 2 percent target as the effects of past tariffs and energy prices pass through completely. That said, in a scenario where actual inflation does not start to cool down soon, I believe that it could be appropriate to reconsider our current policy stance to ensure we fulfill our commitment to deliver price stability.

Stocks are lower this morning as the chip sell-off continues. Bonds and MBS are up.

Housing starts rose 19% MOM and 3.5% YOY to a seasonally adjusted annual average of 1.43 million units. Building permits fell 3% MOM and rose 2.3% YOY to a rate of 1.37 million units.

Homebuilder sentiment remains depressed as affordability concerns persist according to the NAHB Homebuilder Sentiment Index. Sentiment has remained at a low level for 40 consecutive months, the longest streak since 2012. Builders are cutting prices to move the merchandise as is evident in the falling gross margins for the big publicly traded builders. Last month 37% of builders reported price cuts of around 6%.

“Many potential buyers remain on the sidelines as they wait for lower mortgage rates, more certainty on inflation and a clearer economic outlook,” said NAHB Chairman Bill Owens, a home builder and remodeler from Worthington, Ohio. “The recently enacted 21st Century ROAD to Housing Act contains important provisions on land-use and zoning, regulatory reform and financing tools that address obstacles facing builders and buyers, but these reforms will take time to implement.”

“With the HMI below 40 for 15 straight months, affordability remains the home building industry’s primary challenge, as elevated mortgage rates, costly land, rising material prices, and persistent skilled labor shortages continue to affect the market,” said NAHB Chief Economist Robert Dietz. “Looking ahead, the newly enacted housing law is a positive step that will help expand housing supply and lower overall housing costs, although more policy change is needed at the state and local level.”

Dallas Fed President Laurie Logan called for “modestly higher” interest rates to bring down inflation. “I currently believe modestly higher interest rates would better balance the outlook and risks for the FOMC’s dual mandate goals,” Logan said in prepared remarks for a speech in Houston. “Every month of above-target inflation has compounded the strain on Americans’ budgets. … One month of relief is not enough. It is time to finish the job of restoring price stability,” she said. “In monetary policy as in hockey, you have to skate where the puck is going. Unfortunately, inflation does not appear to be headed sustainably back all the way to 2 percent.”

Pending home sales fell 5.4% last month. All regions fell on the MOM basis, but the Northeast and Midwest rose annually. Affordability issues continue to weigh on the housing market.

“The highest mortgage rates in nearly a year and the record-high national median home price together are contributing to a tepid housing market that is especially difficult for first-time homebuyers,” said NAR Chief Economist Dr. Lawrence Yun. “However, job gains can help support housing demand.”

“It is worth emphasizing that it is closing activity, not contract signings, that generates economic impact. Pending contracts are only suggestive of upcoming closed deals and do not align perfectly, due to fallout rates and contract contingencies.”

Homebuyer affordability slipped again, as high mortgage rates negatively impact buyers. The National Association of Realtors measures affordability by calculating the income required to afford the median home. In this case, the median home price is $446k and the income required to afford it is $109,500.

Affordability has improved on a YOY basis, but the monthly numbers have been declining as the war in Iran pushes up bond yields and mortgage rates.

Stocks are lower this morning as chip stocks sell off. Bonds and MBS are up.

Inflation at the wholesale level fell 0.3% MOM and rose 5.5% YOY. The Producer Price Index excluding food and energy rose 0.2% MOM and 4.7% YOY. These numbers were below Street expectations. Goods inflation fell 1.4% MOM and rose 7.9% YOY. Services inflation rose 0.2% MOM and 4.6% YOY.

The ceasefire-driven decline in energy prices accounted for the monthly drop in the index. Given that hostilities are back on the table, the Fed is unlikely to be dissuaded from its tightening bias. The July Fed Funds futures backed off July hike bets slightly, which are now around 10%.

In terms of housing, construction rose 3.5% YOY. Lumber and plywood were up 6.1% and 8.2% respectively.

Retail Sales increased 0.2% MOM and 6.7% YOY, according to the Census Bureau. If you strip out vehicles and gas, they rose 0.4% MOM and 5.7% YOY. These numbers are not adjusted for inflation, so it means that retail sales were up about 3% YOY in real terms.

In other economic news, initial jobless claims slipped to 208k last week and the Philly Fed index spiked higher.

Economic activity increased at a “slight to moderate” pace in most districts over the past 6 weeks, according to the Fed’s Beige Book. Consumer spending edged up, while employment conditions deteriorated slightly. Skilled labor is still hard to find for many employers.

Price increased moderately during the period, although growth rates were similar to or slower than the previous period. The report noted that customers were becoming more sensitive to price hikes and many were unable to pass on input price increases fully to their customers.

Mortgage credit availability decreased in June, according to the MBA. Lenders saw less activity in government loans, while non-QM continued to increase. “Mortgage credit availability decreased in June to its lowest level since December 2025,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “A contraction in government loan programs accounted for a significant share of the June decrease, as lenders pulled back on FHA and VA streamline refinance loan programs, particularly those for high LTV and low credit score borrowers. The jumbo index increased slightly, supported by new non-QM programs, which is consistent with other market data showing a larger non-QM share of originations.”

Stocks are flattish this morning as earnings continue to come in. Bonds and MBS are down.

Fed Chairman Kevin Warsh participated in Day 1 of the Fed’s semiannual Humphrey-Hawkins testimony. Here are his prepared remarks.

The members of our Committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability. This was the focus of our June meeting, at which we decided to hold the target range for the federal funds rate at 3-1/2 to 3-3/4 percent.

Naturally, our work at the Fed demands a proper reading on economic conditions. As you see in our Monetary Policy Report, economic activity is expanding at a solid pace, showing resilience in the face of recent developments. Household consumption growth is moderate. Manufacturing output has moved up steadily this year. The housing sector, however, gives a different picture and continues to lag.

Because core inflation is a good guide to future inflation, I am concerned that, if this upward trend continues, it will be hard to push inflation back toward the Committee’s 2 percent goal with monetary policy at its current setting. As I said in a May 22 speech, I am cognizant of the mistake we made in 2021 by not responding sooner to the high inflation we observed, and I am determined to avoid repeating it.²

But the desire to avoid past mistakes is often the author of new ones. I argued in remarks on July 6 that one of the most important jobs of a policymaker is to clearly assess current economic conditions and not just rely on past experience to guide judgments of where policy should be headed.³ As I will explain, there are some crucial differences now compared with 2021, and there is still a credible case for inflation to begin to fall back to our 2 percent goal with policy at its current setting. But I am concerned about the equally plausible case that data in the coming weeks will show that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term.

I am committed to returning inflation to the FOMC’s 2 percent goal but also determined to avoid overtightening policy and risking a recession. Tomorrow’s inflation data will be one of several data releases I’ll be looking at to determine the appropriate path of policy.

I would note the following language: “still a credible case” that we won’t have to hike rates and “equally plausible” case that we will have to raise rates. The body language points to rate hikes in the future unless something drastically changes.

After yesterday’s CPI print, the Fed Funds futures for the July meeting took down their bets for a rate hike. Prior to the number, we were looking at a 40%-50% chance for a rate hike in a couple of weeks. Now it is under 20%. The December futures still see a 82% chance we get a hike this year and a 40% chance we get at least 2.

Yesterday’s low CPI number was driven by falling energy prices, which are reversing a little after the cease fire deal in the Persian Gulf fell apart. Will we see a spike in oil back to $100+? My guess is that additional production coming on line will help prevent that. Energy companies have had enough time to adjust output to rising prices and are almost certainly reacting.

Small business optimism improved in June, according to the NFIB Small Business Optimism Index. The improvement was driven primarily by improved expectations for sales and the economy. Pricing pressures increased however as a net 38% reported raising prices.

“Current economic conditions present small business owners with both
encouraging developments and ongoing challenges. Lower oil prices
provide welcome relief for almost all businesses, especially those that rely
on transportation, deliveries, and other oil-related activities, while also
leaving consumers with more discretionary income. For many owners,
easing fuel prices help offset some of the other cost pressures (insurance,
supplies/inventories, payroll) that continue to stress profits.”

While inflation was mentioned as the #1 problem facing small business (taxes are #2), the comments from companies continued to point to difficulties recruiting employees.

Mortgage applications fell 2.7% last week as purchases fell 7% and refis rose 4%. “Mortgage applications declined as the 30-year fixed rate increased to 6.65% , the highest level since August 2025. Purchase applications were down over the week and dipped below last year’s pace in the week following the July 4th holiday,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Despite higher mortgage rates, refinance applications increased, led by FHA and VA refinance applications rising 9 and 10%, respectively.”

Stocks are lower as earnings season kicks off. Bonds and MBS are down as oil rises.

The Iranian blockade is back in the Strait of Hormuz. This won’t be positive for oil prices or inflation, however as they say in the commodities markets the cure for high prices is high prices. New production sources have been coming on line.

The consumer price index fell 0.4% MOM and rose 3.5% YOY. A big decline in energy prices during June (down 5.7%) drove the monthly drop. Excluding food and energy, the core rate was flat and rose 2.6% on a YOY basis. These numbers were well below expectations. Oil is down markedly over the past month.

Kevin Warsh heads to the Hill for his first Humphrey-Hawkins testimony in front of Congress. I don’t see the prepared remarks out anywhere. It will be interesting to hear questions about Warsh’s proposed task forces and Congress’s view of them.

JP Morgan reported better than expected earnings this morning on trading profits. EPS rose 30% QOQ and 46% YOY to $7.70 per share ($6.14 excluding special items). Revenues increased 15% QOQ and 28% YOY.

Mortgage origination volume rose to $17.2 billion (up 27% YOY). Production revenue fell 3% YOY and servicing revenue declined 9%, however.

On the economy, CEO Jamie Dimon said: “The U.S. economy has demonstrated notable resiliency this year, with stronger business investment and hiring. This strength is being supported by several tailwinds, including AI-driven capital investment, fiscal stimulus and the benefits of more efficient regulation. However, several risks are shifting below the surface like tectonic plates, including geopolitical tensions and wars, sticky inflation, large global fiscal deficits and elevated asset prices. We cannot predict how these forces will ultimately play out. They may remain manageable, but they could also cause meaningful disruptions when they shift or collide. We carefully monitor these risks and prepare the Firm for a wide range of scenarios to ensure that we can serve our customers and clients consistently in all environments.”

Fed Governor Waller gave a speech about monetary policy at a crossroads. In it, he telegraphed rate hikes ahead:

But the desire to avoid past mistakes is often the author of new ones. I argued in remarks on July 6 that one of the most important jobs of a policymaker is to clearly assess current economic conditions and not just rely on past experience to guide judgments of where policy should be headed.³ As I will explain, there are some crucial differences now compared with 2021, and there is still a credible case for inflation to begin to fall back to our 2 percent goal with policy at its current setting. But I am concerned about the equally plausible case that data in the coming weeks will show that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term.

Waller went on to discuss the fact that the dual mandate requires the Fed to pay attention to the headline number, not the core number but chasing oil prices can be an issue. If energy prices work their way downward, this should be good news for returning inflation to its 2% goal.

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

We have a pretty busy week ahead with Kevin Warsh’s first Humphrey-Hawkins testimony, the consumer price index, the producer price index, housing starts and retail sales. We will have plenty of Fed speakers as well. Earnings season kicks off Tuesday with all the big banks reporting.

The US and Iran exchanged fire over the weekend, which is pushing up bond yields and oil prices. The US hit staging areas Iran uses to attack commercial vessels transiting the Strait of Hormuz. Iran attacked facilities in Bahrain and Kuwait.

The Fed has established task forces to address monetary policy. These task forces will address communication, the Fed’s balance sheet, data, productivity & jobs, and inflation frameworks.

“The Federal Reserve’s commitment to price stability and maximum employment is unwavering. As is our resolve to pursue our mandate with rigor,” said Chairman Kevin Warsh. “The U.S. economy has changed significantly over the last generation, and never more so than right now. Each task force will carefully consider whether policymakers’ means and methods, analytical tools and policy approaches can be improved upon. I am honored that the best minds from a range of disciplines have agreed to work with us to sharpen our performance as an institution. The goal is straightforward: to ensure the Fed is best positioned to achieve our objectives in this consequential time.”

One of the big issues facing the Fed is that many of its tools are survey-based and response rates have been falling. The lower the response rate, the lower the signal-to-noise ratio.

Kevin Warsh’s Humphrey-Hawkins testimony will be interested especially concerning Fed guidance and spoon-feeding the markets. While Jerome Powell, Ben Bernanke and Janet Yellen were very forthcoming about policy intentions, I suspect Warsh might return to the days of Alan Greenspan, who’s inscrutable answers were his method of deflecting the questions away.

I suspect housing affordability will be a big issue and the Fed’s role in it. Unfortunately, we are at the closing the barn door after the horse has left stage on housing affordability, and there isn’t much the Fed can do about it. The lesson from 2021 is that making housing affordable via buying MBS and driving down rates just makes house prices higher and works against affordability.

The ROAD to Housing Act, which became law in June officially went into effect over the weekend. Trump did not sign the bill because he wanted Voter ID in place and there aren’t enough votes to pass it.

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

Existing home sales fell 2.4% MOM in June, but rose 2.8% YOY. The median home price rose 1.8% YOY to $440,600. It seems that home price appreciation is beginning to pick up from the doldrums of the past few years. At the end of June there were 1.56 million units for sale, representing a 4.5 month supply. This is better than the sub-4 levels we had become accustomed to. That said, 6 months is considered a balanced market, so inventory remains low. The NAR affordability index improved markedly from a year ago.

“The back-and-forth in monthly home sales activity, driven by mild fluctuations in mortgage rates, shows how sensitive home buyers are to affordability conditions,” said NAR Chief Economist Lawrence Yun. “However, job gains—more than half a million since the beginning of the year—will continue to provide support for the housing market.”

“The median home price has reached an all-time high. Even so, affordability is better than a year ago because wage growth is outpacing home price growth,” Yun continued. “However, progress on long-term housing affordability could be hampered if inventory growth continues to stall. Without consistent gains in inventory, home prices can accelerate. It is critical to introduce more supply to the market to widen the opportunity for homeownership.”

________________________________________

Hedging tools for mortgage originators:

Non-QM mortgage origination continues to grow and mortgage bankers need a way to hedge their pipeline or book of closed loans awaiting sale. While TBAs are suitable for conforming mortgages, they are not the best fit for non-QM. Eris SOFR Swap futures and Eris Options offer a liquid and margin-friendly way to mitigate risk. Eris Options recently launched and are already seeing widespread appeal, following the largest roll volume in Eris SOFR Swap futures history, with 842,477 contracts trading the week prior.

Exploring Eris Options? click here

__________________________________________

Home prices rose 1.9% annually in June according to the Clear Capital Home Data Index. . Every region improved on a quarterly and annual basis. After a period of tepid, barely positive growth, home prices are perking up.

The hip to be square trade continues with Rochester NY taking the top spot, followed by Milwaukee, Pittsburgh and Birmingham. San Francisco rounded out the top 5, bucking the trend as AI gazillionaires bid up property values.

In the piece, I talk about affordability metrics and specifically discuss the problem with using the median home price to median income ratio. Since it ignores interest rates, it can come up with some misleading data points.

“In 1982, the median home price was a measly $66,400 and the median income was $19,704. With a median house price to median income ratio of 3.5, the boomers would seem to have it way easier than their progeny, who are paying over 5 times. Sure, the median house price was $66,400 and the median income was $19,704, but the mortgage rate was a whopping 17%. The principal and interest payment consumed 48% of monthly income, and that is before property taxes and homeowner’s insurance costs.  Using that analysis, 1982 wasn’t the most affordable year for housing, it was the worst!”

The MP/MI ratio comes up with a diametrically opposed conclusion compared to P&I payments as a percentage of income.

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

The US Treasury auctioned off $39 billion in 10 year notes yesterday, with a bid/cover of 2.59 and a yield of 4.58%. Decent demand, but yields are going the wrong way as the Iranian ceasefire is over.

The FOMC minutes were released yesterday, and they shed light on the new thinking at the Fed. A majority of the participants supported the idea of saying less and becoming more opaque. Transparency at the Fed is really a recent phenomenon that came in the aftermath of the 2008 financial crisis when the Fed wanted to convince the world it was committed to escaping a deflationary spiral. Things like the post-meeting press conference, the dot plot, economic forecasts didn’t exist prior to that.

On the subject of monetary policy, the minutes gave little indication of where the participants thought policy was headed.

Most participants remarked on scenarios in which inflationary pressures would dissipate and inflation would soon begin to return to 2 percent. In such scenarios, almost all of these participants noted that it would likely be appropriate to maintain or eventually lower the target range for the federal funds rate. Most participants, however, also pointed to scenarios in which, in the context of stable labor market conditions, inflation would remain elevated due to strong AI-related demand, the conflict in the Middle East, or the effects of tariffs. In such scenarios, almost all of these participants indicated that some policy firming would likely be warranted to return inflation to 2 percent. Regarding participants’ individual assessments of appropriate monetary policy under what each participant judged to be the most likely scenario for the economy, many participants indicated that the appropriate level of the federal funds rate would be within or slightly below the current target range at the end of this year. Many other participants, however, assessed that the appropriate level of the federal funds rate would be above the current target range at the end of this year. Participants noted that their future policy actions would depend on incoming information.

To recap: Most participants said inflation could fall. Most participants said inflation could rise. Many participants thought rates could go down. Many other participants though rates could go up. Everyone agreed that incoming information is important.

“I like it. One dog goes one way, the other dog goes the other. And then this guy’s saying, ‘whaddya want from me?’ You want guidance? You get oogatz.

________________________________________

Hedging tools for mortgage originators:

Non-QM mortgage origination continues to grow and mortgage bankers need a way to hedge their pipeline or book of closed loans awaiting sale. While TBAs are suitable for conforming mortgages, they are not the best fit for non-QM. Eris SOFR Swap futures and Eris Options offer a liquid and margin-friendly way to mitigate risk. Eris Options recently launched and are already seeing widespread appeal, following the largest roll volume in Eris SOFR Swap futures history, with 842,477 contracts trading the week prior.

Exploring Eris Options? click here

__________________________________________

First time homebuyers underestimate the cost of homeownership, according to a survey from Credible. A total of 73% of first time homebuyers underestimated the cost of homeownership by about $400 a month. They failed to take into account property taxes, homeowners insurance, maintenance and HOA fees. Many of these fees are rising faster than inflation, which is increasing the gap. A total of 35% of these buyers report not having emergency funds for unexpected repairs.

This speaks to the education responsibility that we have in the mortgage industry to make sure our borrowers (especially the young ones) aren’t blindsided when they make a purchase.

Stocks are lower this morning after the ceasefire with Iran breaks down. Bonds and MBS are down.

The FOMC minutes are due out at 2:00 pm today. It probably won’t be market-moving, but just be aware.

The ceasefire in Iran is over, according to President Trump as the two sides exchanged fire. North Sea Brent jumped 5% and the 10 year bond yield is pushing towards 4.6%. “The U.S. strikes are in response to Iranian attacks on three commercial vessels that were transiting the Strait of Hormuz. Iran’s demonstrated aggression was unwarranted, dangerous, and a clear violation of the ceasefire.”

New York Fed President John Williams said that monetary policy is in a “good place” and he supports new Fed Chairman Kevin Warsh’s view that forward guidance should be dialed back. “Given the uncertainties that we face in terms of inflation and the economic outlook, trying to give explicit forward guidance about where interest rates are going to be was no longer appropriate,” he said. “The uncertainties are too great.”

Mortgage applications fell 2.2% last week as purchases fell 1% and refis declined 4%. The week included an adjustment for the 4th of July holiday. “Mortgage application volume was little changed during the week of the nation’s 250th Independence Day celebration, as the 30-year fixed rate increased slightly to 6.58%,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “After adjusting for the Independence Day holiday, government purchase volume increased modestly, led by a 5% gain in VA purchase applications, while conventional purchase activity declined. Refinance application volume was down 4%, as homeowners saw little enticement to act with rates still elevated.”

________________________________________

Hedging tools for mortgage originators:

Non-QM mortgage origination continues to grow and mortgage bankers need a way to hedge their pipeline or book of closed loans awaiting sale. While TBAs are suitable for conforming mortgages, they are not the best fit for non-QM. Eris SOFR Swap futures and Eris Options offer a liquid and margin-friendly way to mitigate risk. Eris Options recently launched and are already seeing widespread appeal, following the largest roll volume in Eris SOFR Swap futures history, with 842,477 contracts trading the week prior.

Exploring Eris Options? click here

__________________________________________

The services economy reached a 4 month high according to the S&P PMI report. New orders drove the increase. That said, it wasn’t enough to increase employment.

“A key underlying factor behind the relatively subdued performance of the services economy was again elevated price pressures. Although easing slightly, aided largely by lower oil prices, costs continued to rise at a steep rate in June, driving up rates levied for services. Customer push-back against these high prices was again widely reported, most notably in consumer-facing businesses. Consumer-facing companies are nevertheless reporting that further price falls should help stimulate sales in the months ahead, providing a ray of hope for both the growth and inflation outlooks.”

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

Iran fired missiles at two commercial ships, just as traffic is returning to normal in the Strait of Hormuz. So far markets are taking it in stride.

The services economy continued to expand in June according to the ISM Services Report. That said, expansion did decelerate a touch compared to May. New Orders and Activity decelerated, while employment moved from contraction to expansion. Notably, price inflation decelerated (meaning prices are still rising overall, just not as widespread or as rapidly).

“Respondents in June commented less frequently about pricing impacts on petroleum products, while tariff impacts continued to be a theme for increased pricing pressure. The Inventories Index dropped to its second-lowest level since October 2025, indicating that the buy-ahead phenomenon from earlier in the year may be over. The Imports Index dropped into contraction territory for the first time in five months, down from a spike to 55.2 percent in March, its highest level in over two years. The Backlog of Orders Index reached its second-highest level in almost four years. These readings, taken with respondent commentary, seem to indicate that supply chains are stabilizing amid sustained business activity, giving confidence to businesses that selective, yet modest, increased employment is warranted. World Cup-related hiring in the U.S. likely contributed to the increase to the Employment Index. Of the 18 services industries, nine of them — representing over 58 percent of U.S. gross domestic product (GDP) — reported higher employment levels in June. This represents widespread confidence that hiring is again warranted to support activity levels.”

With the energy shock largely over (at least with respect to oil prices) and tariffs beginning to roll off (the 4 month extension expires this month) we should see a marked improvement on pricing pressures, which will hopefully keep the Fed at bay.

The Atlanta Fed GDP Now index sees only 1.3% growth for Q2. Note that the big decline in late June is due to trade balance estimates. Consumption and investment are still at levels associated with 3% growth. In other words, GDP growth will be sluggish, but it won’t necessarily “feel” sluggish.

________________________________________

Hedging tools for mortgage originators:

Non-QM mortgage origination continues to grow and mortgage bankers need a way to hedge their pipeline or book of closed loans awaiting sale. While TBAs are suitable for conforming mortgages, they are not the best fit for non-QM. Eris SOFR Swap futures and Eris Options offer a liquid and margin-friendly way to mitigate risk. Eris Options recently launched and are already seeing widespread appeal, following the largest roll volume in Eris SOFR Swap futures history, with 842,477 contracts trading the week prior.

Exploring Eris Options? click here

__________________________________________

Despite the narratives in the press Gen Z is buying houses and accounted for 1 in 5 purchase locks in the second quarter. Gen Z is still in their 20s, so this is good news. Gen Z accounts for a third of the first time homebuyer loans and 27% of FHA lending. These borrowers tend to have shorter credit histories, which generally means lower credit scores.

It looks like home price appreciation accelerated in June, according to ICE’s housing price index. It rose 0.29% MOM and 1.3% YOY. We are still below inflation, which means that real (inflation-adjusted) prices continue to fall and are now about 5% off of peak levels. As wages increase, affordability will return, especially if inflationary pressures decrease and allow the Fed to hold rates here.