The Daily Tearsheet

Stocks are lower as the tech sell-off continues. Bonds are rallying on the risk-off trade.

We had quite the reversal in rates yesterday after the hot CPI report. In the immediate aftermath, the 10 year yield spiked to 5.33% before gradually working its way lower to close at 5.2%. This morning, we are below 5.1%. Note this is again not just a Treasury phenomenon – sovereign yields are down across the board this morning pretty dramatically. Not sure what is driving that. – there doesn’t appear to be any identifiable catalyst.

The October Fed Funds futures initially forecasts a 50/50 chance for a rate hike at the end of the month, but it has since faded to a 30% chance of a hike.

Inflation at the wholesale level shot up 1.3% MOM in September according to the Producer Price Index. The headline number rose 6.3%, and this report is way higher than expectations. Ex-food and energy the index rose 0.7% MOM and 5.0% YOY. The PPI is less important than the CPI, but it shows commodity price inflation is hot, hot, hot. This is not good news for the Fed and those of us who want lower rates.

Retail sales rose 0.8% MOM, which was higher than expected. Gasoline drove the increase. Ex gas and vehicles, sales rose 0.2%. The headline number was up 6.3% compared to a year ago and the core rate was up 5%. Note these numbers are not adjusted for inflation, but still this speaks of a strong back-to-school shopping season and foretells a strong holiday shopping season. So while gas prices are annoying and consumer confidence is back at global financial crisis levels, consumers are saying one thing and doing another.

The retail sales number and the hot PPI give the Fed the leeway to raise rates as it appears the economy is not being held back by monetary policy one bit. In other words, r-star (the neutral Fed Funds rate) might be a lot higher than previously thought.

Fannie Mae updated its forecasts for next year. It now sees the 30 year fixed rate mortgage averaging 7.5% in 2027, a big increase from the 6.7% it was forecasting last month. It also took down its 2027 origination forecast from $2.28 trillion to $1.87 trillion. Home price appreciation is expected to slow to just 0.6%. Yes, mortgage rates spiked to 7.5% pretty dramatically at the end of September, but I would be cautious saying that is the new normal. Bond market volatility is playing a part there.

Chicago Fed President Austan Goolsbee was interviewed yesterday and said that he is worried that the inflation we are seeing now isn’t simply a tariff-driven / oil shock phenomenon that will fade. He sees the inflation story changing:

And we were hoping that – we had a couple of months of encouraging inflation readings, and we were hoping that the recent uptick might prove to be a blip. And so far, it’s not. The danger is that the inflation is less coming from things that might naturally go away, like tariff impacts on prices, and is shifting more to just old fashioned overheating of demand. And if it were, everybody’s pointing the finger at the AI buildout, the high investment. You hear a lot out on the trail. You hear a lot of comments that construction costs are rising radically, electronic components, electricians, even land – that anything that data centers and their booming investment are involved in, the software and others you’re seeing prices rising pretty rapidly.

The AI buildout has been a bit of a gold-rush situation similar to the CAPEX we saw in the late 90s. These investments are supported by debt, and if the cash flows don’t materialize then the buildout slows dramatically. I would be wary extrapolating out this year’s torrid pace of CAPEX too far.

New home mortgage applications slipped 8.3% in September compared to a year ago. Again, blame high rates though median new home sales prices are still below the median existing home price which is an unusual phenomenon.

“The increase in mortgage rates in September had a chilling effect for new home purchase activity. Both mortgage applications and new home sales declined and fell further behind last year’s pace,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “MBA’s estimate of new home sales at 584,000 units was the weakest sales pace since April 2020. The FHA share of applications decreased, and the average loan size increased, as higher mortgage rates had a greater impact on first-time homebuyers’ purchase decisions.”

Stocks are lower this morning after a disappointing CPI report. Bonds and MBS are down.

Chatter from the MBA is how to handle Vantage versus FICO, UAD 3.6 implementation and Bill Pulte’s disappearance. Generally speaking people are hoping that the 10 year settles in and as volatility decreases, MBS spreads will compress again to bring rates closer to 7%.

JP Morgan didn’t discuss the $688MM pretax loss on investments in Corporate on the conference call yesterday. That sector is generally where the bank holds investments in Treasuries, RMBS and other assets. Widening spreads at the end of the month (they really blew out late) could explain it. I wonder if the widening on RMBS and the increase in the basis on DSCR was people tossing underperforming stuff overboard to get it off their balance sheets for the 9/30 closing.

For the DSCR space, investors are turning up their noses at 7% WACs and below. Liquidity is terrible in those rates. Even with a heavy percentage of loans with prepay penalties, negative convexity is still prevalent in this paper.

Consumer inflation rose 0.6% MOM and 3.7% YOY in September according to the Consumer Price Index. The headline numbers were in line with Street expectations, however the core rate was a touch higher than expected at 0.3% MOM and 2.6% YOY. Gasoline prices were the main driver of the headline index.

Shelter inflation rose 0.4% MOM and 3.2% YOY. Again, given home price appreciation is around 2% and average asking rents have flat YOY, something seems to be off in BLS’s owner’s equivalent rent calculations. This has been an issue since home price appreciation leveled off in 2022.

The Fed Funds futures now see 47% chance for a rate hike at the end of the month compared to 18% yesterday. Bond yields are up markedly this morning as well.

Existing home sales rose 1.5% MOM and declined 2.2% YOY according to the National Association of Realtors. “Despite the small monthly gain on a seasonally adjusted basis, August and September marked the two slowest months for home sales this year,” said NAR Chief Economist Lawrence Yun. “Further increases in mortgage rates in recent weeks mean fewer buyers can qualify to purchase a home.”

“Higher inventory and lengthening days on market give buyers improved negotiating power. Home sellers need to be realistic about local market conditions, which could require price discounts and other incentives to attract buyers,” Yun said.

The median home price rose 1.3% from a year ago to $412,300. Affordability decreased in 3 out of 4 regions, rising only in the West (which is puzzling). Days on market rose to 33 days from 31 and mortgage rates were up about 35 basis points.

Mortgage applications fell 2.7% last week as purchases fell 4% and refis decline 0.4%. “Mortgage applications decreased as rates moved higher last week. The 30-year fixed rate was 7.5%, the highest rate since November 2023 and more than a percentage point higher than a year ago,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “As a result, borrowers continue to rely more on ARM loans to help lower their monthly payments. The ARM share at 10.5% was at its highest level since October 2025. Last week’s decrease in refinances was mainly driven by a 5% drop in FHA refinance applications.”

ARMs accounted for 10.5% of loans, the highest in a year.

Stocks are flattish as earnings season kicks off. Bonds and MBA are up.

I am at the MBA in Chicago and the mood seems to be cautious. Everyone is worried about the effect that last month’s surge in interest rates will have on pipelines and volumes. Mortgage bankers are putting together their budgets for next year, and volume forecasts are difficult. Lots of vendors out and about, and everyone is pitching some AI solution.

The week ahead will be dominated by the CPI on Wednesday and the PPI on Thursday. The Street is looking for a 0.6% monthly increase and a 3.6% annual jump on the headline rate and a 0.2% MOM / 2.5% increase on the core rate. In addition to the inflation data we will get retail sales and existing home sales. Retail sales will contain the back-to-school shopping season which is usually a good indicator for the holidays. Consumption is just under 70% of the US economy, so it can move the GDP estimates.

Q3 earnings season kicks off this week with the big banks reporting.

JP Morgan reported earnings per share of $5.57, a 10% increase from a year ago. Revenues were up 8% YOY. JPM took a special charge of $500 million on investment losses. Credit losses ticked up to $2.7 billion compared to last quarter however they were down compared to last year.

The $668MM pretax charge in investment losses came from corporate, and they didn’t specify what specific investments caused the losses. Perhaps they will get into it in the call, but this sector is where the their RMBS would live, and my guess is that widening MBS spreads might be the culprit.

Mortgage origination volume was $20.4 billion compared to $16.9 billion a year ago. Charge offs were flat sequentially and down substantially compared to a year ago. On the overall state of the economy, JP Morgan CEO Jamie Dimon said: “The U.S. economy continued to be fueled by strong business investment and ongoing consumer spending. However, large fiscal deficits, sticky inflation, elevated asset prices, rising interest rates and geopolitical conditions continue to shift under the surface. These forces may be manageable, but we remain prepared for a wide range of outcomes.”

Consumer sentiment fell slightly in October according to the University of Michigan Consumer Sentiment Survey. “While year-ahead expectations for personal finances and business conditions crept up slightly, buying conditions for durables plummeted amid high prices and borrowing costs. Increases in sentiment among Democrats and Republicans were offset by a decline among independents this month. Overall, sentiment for lower-income consumers and those with smaller stock portfolios dropped steeply this month, groups that have fewer resources to weather increases in prices. Frustration over cost-of-living continues to mount, as consumers across the political spectrum believe that the trajectory of the economy has weakened since the beginning of the year.”

Inflation expectations rose 10 basis points for the year ahead and for longer-term. Cleveland Fed President Beth Hammack yesterday said “Long-run inflation expectations have stayed remarkably well anchored despite actual inflation being above target for more than five years,” Hammack said. “But I’m not taking that for granted. With each passing month, persistently elevated inflation raises the risks of an inflationary mindset becoming entrenched in the economy”

Inflationary expectations become embedded in two ways. The first is the wage-price spiral where workers demand higher wages, which flows into higher prices for the goods they produce. This was a highly prevalent in the 1960s and 1970s when a huge chunk of the US labor force was unionized. CPI forecasts would be written into contracts, which was one of the drivers of 1970s inflation. Today, that is probably less of a concern.

The other vehicle is consumers and producers front-loading purchases in order to beat price increases, which exacerbates supply chain issues. This is probably the more clear and present danger as businesses front-load commodity purchases which drives up prices. This could be steel, diesel or any host of inputs.

The University of Michigan inflation expectations is a concern, however if it doesn’t translate into a behavior change then it doesn’t really matter all that much. As always keep in mind that consumer sentiment numbers are often nothing more than a measure of gasoline prices.

The Wall Street Journal discovers the DSCR loan.

Small business optimism decreased in September, according to the NFIB Small Business Optimism report. The uncertainty index increased while the labor index fell. Capital spending plans decreased and remained below their 52 year historical average. This is surprising given the massive investment in AI and data centers. The number of companies increasing prices was the same as last month. The most commonly reported single biggest problem was labor quality followed by inflation.

“The Fed raised its policy rate as most observers expected, and market rates followed suit. Small business borrowers reported higher rates on their recently received loans. Higher rates are supposed to restrain borrowing. Those who continue to finance spending will inevitably raise prices. Consumer spending has been resilient, boosting sales and profits. Strong profits have energized the stock market, making strong capital gains available to support spending.

Inflation pressures on Main Street remained stubbornly high, with nearly a third reporting raising their selling prices in recent months. The historical average raising prices is net 14%. Nearly 31% plan to raise prices, strong pressure on future prices.

On employment, the AI boom hasn’t done much in changing the overall jobs landscape. Hi-Tech activities are not labor-intensive, and small business owners have not been aggressive employers. Job openings for skilled workers fell, while openings for unskilled workers rose.

Overall, consumer spending and the AI boom will help keep the
economy growing at a healthy pace for the rest of the year. However,
major uncertainties remain to be resolved, including the mid-term
elections and the Iran war. Much will depend on how these play out.

Stocks are higher despite a weak revenue report from OpenAI. Bonds and MBS are flat.

Home price appreciation decelerated in September according to the Clear Capital Home Data Index. Prices rose 0.7% quarterly after rising 1.5% quarterly in August. On an annual basis prices rose 2.0%. The hip-to-be-square trade continues with the Northeast and Midwest outperforming the South and the West. New York City took the top spot as the best performing MSA, with prices up 2.2% quarterly and 5% annually. The bottom 15 MSAs were dominated by the West, with Honolulu, San Jose, Tucson, Denver and Seattle all getting slammed.

Here is something that should make people in the mortgage business feel better. This is the cover of the October 10 issue of the Economist:

For those who don’t know, the Economist is a pretty reliable contra-indicator. They are usually so late to the party that by the time they pick up on something the trend is played out. Their most famous cover was “Drowning in Oil” in 1999 when oil was trading at $17 a barrel. Over the next 10 years, oil marched to $124 a barrel. They did a big feature of Cathy Wood of Ark just before her performance nosedived.

This should hopefully make mortgage bankers feel like the shelling might be over. Global sovereign yields are down across the board, even the French OAT. Does this mean the bear market in bonds is over? I don’t think so, but markets don’t go in a straight line, and bear markets often have breathtaking rallies. The secular bear market that began in 2021 will probably go on half a century if history is any guide.

Treasury auctioned off $22 billion in 30 year bonds yesterday at 5.618% with a 2.54 bid to cover ratio. So both the 10 year and the 30 year auctions went off pretty well, all things considered.

Fed Governor Chris Waller said that further rate hikes are probably needed, but there is no rush to push them out immediately. “The hikes do not need to come at consecutive meetings,” Waller told a Central Bank of Turkey forum in Istanbul. “But they should be in place in an acceptable period of time.”

The median apartment rent declined 0.1% in September to $1,388 according to Apartment List. Much of this is simply seasonal variation as we head into the slow part of the year.

Year-over-year rent growth has stagnated since the big runup in the COVID era.

The multifamily vacancy rate ticked down to 7% after hitting 7.3% earlier this year. This is above pre-pandemic levels and reflects the glut of apartments that were built in the COVID era. Things are tough for multifamily as rents are flat and financing costs rise. The index for apartment REITs is down some 5% this year compared to a 13% increase in the S&P.

Where are rents falling the most? San Antonio, Austin and the Sunbelt. The biggest increases are in the Bay Area as the AI boom pushes up prices with limited supply. The remainder of the top markets are mainly in the Midwest, where the cost of living is more affordable.

Mortgage credit decreased in September according to the MBS Mortgage Credit Availability Index. “Mortgage credit availability decreased slightly in September, as lenders tightened documentation requirements on conventional loans and reduced offerings of loans that allow for cash-out refinances and investor home purchases,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “This tightening in credit supply also impacted jumbo loan programs, which saw credit availability decline for the second consecutive month. However, recent growth in non-agency loan programs continues to support this segment of the market. The government index was unchanged and has remained stable over the past three months.”

Stocks are lower this morning as oil rises 5%. Bonds and MBS are down.

Bonds rallied yesterday on the decent 10-year auction, but the rally was short-lived which is typical in a bear market. The path of least resistance for rates is decidedly up.

Fed Governor Chris Waller spoke this morning. Here are his prepared remarks. On further policy, he had this to say: “Based on some key data released last week, I see the economy in roughly the same place as it was at the time of the FOMC’s September meeting. While the number of jobs created was down overall, the employment report indicated that the labor market continued to be solid and stable in September. The unemployment rate remains relatively low and near the median of policymakers’ projections of its longer-run level, while payroll gains are in the range of estimates of breakeven to keep the unemployment rate steady. August inflation data, which included revisions to the government’s methodology, showed monthly core PCE inflation of 0.25 percent and the 12-month change at 3 percent. Looking at the history of 12-month core inflation, it has been between roughly 2.5 percent and 3.0 percent since the spring of 2024. This is obviously higher than we want, above our target, and not showing sufficient progress. Overall, the new data reinforce my view that the labor market is stable and inflation is too high. For at least the near term, policy will be focused on the inflation side of our mandate.”

Note that the bloodbath in the long end of the curve and global sovereign debt is not mentioned. I had hoped that the Fed might consider that to do the the tightening work for them, but he didn’t address it.

The FOMC minutes were released yesterday and didn’t have much impact on the market. The Committee noted that “inflation remained elevated and that they had not seen sufficient progress on lowering inflation in recent months.” While some of these effects were considered temporary (things like tariffs, the war in Iran, AI buildouts) the fear is that inflation expectations might become embedded into the economy and drive price and wage decisions (the classic wage-price spiral).

They saw the labor market as stable and “at or near maximum employment.” They noted that we are in a low hire / low fire environment and most agreed the labor market had strengthened recently. Some participants argued that the labor market isn’t driving inflation.

They also noted that the economy in general appeared to be “solid” and that credit spreads was generally available. Higher mortgage rates were expected to be a drag on housing.

Everyone agreed that that it was appropriate to increase the Fed Funds rate by 25 basis points and most believed another rate hike would be necessary this year. That said they made the usual caveats about being data-dependent. Note this quote on r-star: “A couple of participants remarked on having increased their estimate of the neutral federal funds rate and thus their view of the appropriate setting of the target range for the federal funds rate. Several participants stated that they viewed the current policy rate as not restrictive or only mildly restrictive.” It is getting harder and harder to support the idea that the current Fed Funds rate is restrictive given the employment situation and the overall growth of the economy.

UWM is changing its credit score policy by now selecting the best score from FICO and Vantage. “Our goal is simple: put borrowers in the best possible position while making it easier for brokers to do business,” said Mat Ishbia, President and CEO of UWM. “No one should have to worry about which credit model wins. We handle that automatically by obtaining FICO and Vantage on all credit pulls to help consumers save more money and improve affordability, empowering brokers to close more loans and further strengthening UWM’s position as the mortgage industry leader in delivering innovation, value and better outcomes for brokers and borrowers alike.”

UWM stock has gotten crushed this year, with the stock well below the $2 strike price for the rights issue it wants to do.

Stocks are lower as global yields move higher. Bonds and MBS are down again.

We will have a 10 year auction at 1:00 pm today and the FOMC minutes at 2:00. So we could see some volatility around rates during that time, especially if investors turn their nose up at the auction. The minutes will prove interesting, however the Fed Funds futures are decidedly predicting no change in policy at the October meeting.

NY Fed President John Williams said there is “no need for urgency” in continuing to hike rates. The move in the 10 year over the past month fulfils much of the same role as an increase in the Fed Funds rate. San Francisco Fed President Mary Daly also indicated that an October rate hike might be unnecessary.

The global sovereign debt sell-off continues, with UK Gilt yields up 11 basis points today. French and Italian sovereign yields are up big, with the French OAT up 15 basis points and the Italian BTP up 14. Since global sovereign yields tend to correlate, this is pushing down govvies across the board.

European yields are diverging, indicating investors are getting skittish again about some of the Southern European sovereigns. The spread between the French OAT and the German Bund (the German Bund is still the benchmark for Europe) is now 138 basis points, compared to about 70 at the beginning of the year. The impact on US bonds should be minimal, unless it simply means investors are souring as sovereign debt as an asset class. It is tough to call the sell-off a global risk-on trade given that the breadth in the S&P 500 is pretty lousy. A few big names that dominate the index are driving it higher, while vast swaths of US stocks languish.

It isn’t clear where the money exiting sovereigns is going. It isn’t going into MBS because spreads are widening. There are reports that investors are shortening duration (in other words selling the 10 year and buying 3 month T bills to roll over as the Fed hikes rates.

Mortgage applications fell 4.2% last week as purchases decreased 2% and refis fell 8%. Mortgage rates hit their highest levels in 3 years. “Mortgage rates moved to their highest level in almost three years last week, with the 30-year fixed rate reaching 7.49% as both Treasury rates increased and spreads widened with the increase in rate volatility,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Very few homeowners have an incentive to refinance at these rates, and the jump in borrowing costs has caused many potential borrowers to step back from the purchase market. With rates roughly a percentage point higher than a year ago, refinance applications last week were at the lowest level since 2025 and fell to less than half of last year’s pace.”

By my calculations, the P&I payment on the median home at the prevailing mortgage rate has increased by 20% YTD. So while home prices are falling in real terms (i.e. rising slower than inflation) affordability isn’t being improved because of rate movement.

On the refi side, yes rates are a headwind, but as mortgage rates increase so do credit card rates and other revolving debt. A cash-out debt consolidation refi can still make a lot of sense for a borrower struggling with credit card debt.

Homeowners in the Northeast who generally use heating oil can expect to see big bills this winter. Prices are expected to be $5.26 a gallon, up 34% from a year ago. Luckily we have a strong El Nino, which generally leads to milder winters in the Northeast. That said, heating oil bills for the winter are expected to run about $2,115, up 21% from a year ago.

Blame refining capacity shortages. Global supply disruptions are blowing out crack spreads which influence the price of distillates independent of the level of crude oil.

I will be at the MBA Conference in Chicago if anyone wants to meet. Should be an interesting conference given the move in rates.

Stocks are higher this morning as oil prices ease. Bonds and MBS are up small.

More and more oil is getting out of the Middle East which is helping push prices lower. The blockade on Iranian oil is working and insurance rates are falling. Current transit rates are around 13.5 million barrels per day through the Strait, which is around 80% of pre-war levels. It had fallen to around 6 million barrels per day during March and April. The Saudis have diverted some of their production to pipelines which reach the Red Sea, which is also helping.

Diesel fuel is still elevated, however that is a refining issue more than a crude oil issue. This is particularly an issue in the West Coast where refineries are cutting / shutting down due to onerous environmental restrictions. West Coast refining capacity has fallen some 30% over the past 5 years. Diesel costs flow into all sorts of prices.

Ever since the beginning of the energy prices have seen a double whammy, from rising crude prices and rising crack spreads. The increase in crack spreads (i.e. refining margins) have blown out this year:

Like mortgage rates are a function of the Treasury rate and the MBS spread, gasoline and diesel prices are a function of the oil price and the crack spread. So the issue is a function of refining capacity and oil prices. Since diesel and heating oil are the same thing, East Coast refineries are diverting production to heating oil stocks, which means less diesel. So falling oil prices are encouraging, however they aren’t the whole story and investors hoping for a bond rally on falling crude prices might be disappointed.

The services economy expanded in September, albeit at a slower pace according to the ISM Services Report. Business activity decelerated as did new orders. Employment picked up and prices continue to increase. Exports fell pretty dramatically.

The Prices Index was above 70 for the sixth time in 7 months and hit the highest level since 2022. Energy is the main driver here, especially diesel.

“Tariffs and fuel cost impacts were the most cited issues impacting respondents’ supply chains; in fact, fuel costs were mentioned twice as often as any other single issue impacting performance. Supply chain constraints were also a top concern of respondents and were impacting both lead times and costs. The Employment Index’s first reading above 50 percent in three months seems to have resulted from increasing backlogs, as well as high levels of business activity and new orders. Although business activity and new orders growth rates have eased a bit, the Backlog of Orders index hit its highest level since July 2022 (58.3 percent).”

National rent growth declined in September, according to Apartment.com. The national average rent declined 0.08% from August to $1,752. The West and the South are struggling, while the Midwest and Northeast are a bit more balanced. There was a lot of apartment construction over the past 5 years, and most of it was in the Sunbelt and the Southeast.

A lot of apartment rehab projects were started during the COVID years and these newly refurbished units are competing with new buildings that are offering heavy incentives to lure tenants. These projects were financed with 5 year bridge loans which are coming due. It is going to be hard to refinance these projects given current rates and rent levels. We could start to see some pressure in the resi CLO space.

Berkshire Hathaway picked up more stock in Lennar. It now owns 12% of the company. Berkshire is big in the homebuilding space, owning Taylor Morrison and Clayton. It also has stakes in Lennar, NVR and D.R. Horton. Like mortgage banking, homebuilding is highly cyclical and we are at the nadir of the cycle.

Stocks are flattish this morning on no real news. Bonds and MBS are up small. It is a slow news day.

The upcoming week will be relatively data-light, with only ISM data and consumer sentiment. We will get the FOMC minutes on Wednesday and Fed speakers on Tuesday and Thursday.

Bonds rallied on Friday after the weaker-than-expected jobs report, but the lower rates didn’t last long. It is hard to see a catalyst for the resumed sell-off. Austan Goolsbee made some comments later on Friday, but they seemed relatively benign.

We are in a bear market for sovereign debt at the moment, and one of the main characteristics of a bear market is that the path of least resistance is down. In other words, it doesn’t take a catalyst to sell – it takes a catalyst to buy. Bond market cycles are very, very long. The current one which ended in 2021 began in 1981, when your local bank would pay 17.6% on a six month CD and the 10 year yield was in the high teens.

Chicago Fed President Austan Goolsbee said that both a hike and a pause are “on the table” for the October meeting. “There is plenty ⁠of room ⁠for anything to ​be on the table,” ​Goolsbee told Fox Business’ ‌Edward Lawrence, who asked if he felt the Fed ⁠ought to raise rates or pause this month as ⁠markets ‌now expect. “Let’s see ⁠if we ​can ‌get some evidence ​put together ⁠that suggests we’re headed back to 2% inflation.”

As we look at the Fed Funds futures, the markets are handicapping a 20% chance of a rate hike at the October meeting. The Atlanta Fed GDPNow model didn’t change on the employment report – it still sees robust 3.7% growth for Q3.

Stocks are higher this morning (and oil lower) on a potential plan for the EU to release a 50 million barrels of diesel fuel from storage stocks. The IEA is also considering a release of 50 million barrels of crude. Bonds and MBS are up.

Yesterday’s rally in the 10 year (falling yields) indicates there might have been some end-of-quarter noise going on towards the end of September which pushed yields up above 5.3%.

The economy added 29,000 jobs in September, according to the Employment Situation Report. The unemployment rate ticked up to 4.2% from 4.1%. The payroll number was below expectations, and the unemployment rate was above.

That said, the internals of the report are encouraging. The labor force increased by 485,000 as 346,000 people who were previously out of the labor force re-joined. The number of people employed rose by 406,000, while the number of unemployed rose by 78,000.

This drove the labor force participation rate up by 0.1% to 59.2% and the employment-population ratio to 61.8%. Average hourly earnings rose 3% on a YOY basis.

Health care / social assistance was the leader in payroll additions, followed by manufacturing. Jobs were lost in IT and government.

Stocks and bonds are rallying in the immediate aftermath of the report with the October Fed Funds futures now handicapping only a 14% chance for a rate hike this month.

Fed Vice Chairman Philip Jefferson spoke yesterday and implied that an October rate hike isn’t a slam-dunk:

As we look ahead, my view is that any future adjustments in policy should be determined by carefully examining trends in the data, the evolving outlook, and the balance of risks. Since our September meeting, yields across the term structure have increased further, a sign that investors are reassessing the evolving macroeconomic landscape. My colleagues and I will need to come to our own judgment, which may take more time. I will continue to assess whether underlying trends suggest that inflation will return to target with sufficient speed. With more data in hand, such trends may lend themselves to better discernment, as may the appropriate stance of monetary policy.

Since the September FOMC meeting, the 10 year yield had picked up 30 basis points in yield, and it had been steadily rising in the lead-up to the meeting. Rising long-term rates also have a tightening effect and the Fed doesn’t want to kill the labor market just to move inflation from 3.4% to 2%.

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The manufacturing economy expanded in September, albeit at a slightly slower pace than August. “In September, U.S. manufacturing activity remained in expansion territory. Of the five subindexes that make up the PMI^®, only New Orders and Employment grew faster than the previous month. In September, 40 percent of the comments were positive and 60 percent negative, with a 1-to-1.6 ratio of positive to negative sentiment. Among negative comments, pricing volatility was mentioned in 46 percent, tariffs 34 percent, the Iran war 30 percent and increasing lead times 21 percent; most comments mentioned multiple factors.

Prices increased by 6.8 points, which to the fastest level since the beginning of the Iran War.

Stocks are higher as we enter the final quarter of the year. Bonds and MBS are down small.

The 10 year got smashed again yesterday despite the less bad than feared PCE inflation report. Over the third quarter, the 10 year bond yield increased by 81 basis points. Most of the decline happened last month.

There was no particular catalyst that drove the big decline. Oil did rise, but the move seems outsized given the change. It is a global phenomenon where all sovereign debt benchmarks are getting hit simultaneously. The more interesting question is what are these sellers doing with the proceeds of these sales.

Interestingly, the October Fed Funds futures moved pretty dramatically the other way, with no move now the most likely outcome. They now see a 37% chance of a rate hike and a 63% chance of no change in policy. The December futures have a 58% chance of one more rate hike this year as the base case.

CNBC wins clickbait title of the year “Mortgage rates could reach 9%, says Cotality’s Selma Hepp” If you watch the interview, you see it is more of a worst-case scenario, where the 10 year Treasury goes into the 6%-7% range and people lose confidence in the US dollar as a safe haven asset. Cotality’s base case is that mortgage rates stay in the 7% range.

The most likely scenario for a spike in Treasury rates would probably not be inflation or oil. The worst case scenarios there have come and gone. It would be a debt-ceiling standoff. The debt limit will probably have to be raised in mid 2027, and if the Democrats take Congress there is a definite possibility that we will see some brinkmanship negotiations. The other thing to keep in mind here is that monetary policy acts with a 6-9 month lag, so the effects of the Fed tightening cycle will start to be felt next spring and summer. So that works against higher rates as well.

The US dollar is in zero danger of losing its safe haven status simply because there is no alternative. The debt issues in the US are high, but the competitors (Japan and the EU) have the same issue or worse. Japan’s debt to GDP ratio is 2.5x (compared to the US at 1.3x). The EU and the UK have better debt-to-GDP ratios than the US, but the liquidity of the US Treasury market is better. To be a reserve currency you need liquidity and stability. China will never permit its currency to fluctuate and will impose capital controls if necessary so that currency is out. The US more or less wins by default.

Regardless, 9% mortgage rates don’t seem to be in the cards any time soon. The most likely case is that rates stay here and don’t move much. I think a recession which takes rates back into the 6% level is more likely than her 9% scenario, FWIW.

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More evidence the employment market is getting better: Job cuts fell 18% MOM and 20% YOY to 43,281 according to outplacement firm Challenger, Gray and Christmas. This is the lowest monthly total since 2022. Hiring plans picked up as well.

“Companies are in a wait-and-see period right now. Employers are facing high energy costs, an uncertain war in Iran, a rate hike that could make hiring more expensive, plus the liklihood of surging healthcare costs. We’ve seen layoff activity subside over this year, and September continues to illustrate this point,” said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.

“Hiring plans are up over the year, but we’re not seeing the surge of hiring plans that come with the holiday season, which suggests a very cautious approach,” he added.

Companies are reluctant to add seasonal holiday help quite yet. I guess the fear is that higher gasoline prices are going to depress disposable income which means less spending at the stores. The early indications for back-to-school spending were good, though September retail sales will be a better tell than August’s.

Yesterday’s personal incomes and outlays report caused the Atlanta Fed’s GDP Now model to forecast 3.7% growth for Q3 compared to the 5.1% it was previously showing. That 5.1% number always seemed suspect and was way out of step with the forecasts of everyone else.