The Daily Tearsheet

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

The upcoming week is relatively data-light as is typical for the week following the jobs report. The highlight will be the FOMC minutes where investors will look for clues about how serious the Fed is considering rate hikes. We will also get the ISM services report and existing home sales.

Non-QM loans are starting to show signs of credit stress, which is unsurprising given that many of the MSAs that rallied hard during COVID are now experiencing flat-to-negative price appreciation and flatlining rents. DV01 reports that 30 day DQs for non QM rose 30 basis points in May, and payment rates are at 4 year lows.

Full doc loans are performing best, while bank statement and self-employment income are struggling, particularly with borrowers with sub 700 FICOs. DSCR loans are performing better than bank statement, but are also showing signs of stress.

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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

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Oil prices have fallen back to pre-war levels. North Sea Brent is trading at $72 a barrel, right where it was in late February when the initial strikes began. The markets obviously think that the fighting is over and the Strait will remain open. But it also reflects a natural rule in commodity markets: the cure for high prices is high prices. As oil prices rose, well that had lied dormant were re-opened and brought additional supply to the market. In fact, we have somewhat of a glut at the moment, however many governments including the US and China will want to replenish strategic oil reserves.

So why are gasoline prices still high? Gasoline prices are a refined product and no crude oil. The price of refined goods is tracked via crack spreads, and crack spreads are sitting at highs.

So why are crack spreads not moving down with oil prices? Refining capacity hasn’t kept up with demand, and many West Coast refineries are shutting down because it is too expensive to operate there. Note Exxon Mobil just changed its domicile from New Jersey to Texas. Also demand for auto fuel is robust at the moment (it is the Summer driving season after all). Diesel prices remain high, although refineries will be switching over to diesel / heating oil production in a few weeks.

Stocks are flattish this morning ahead of a long weekend. The bond market closes at 2:00 pm. Bonds and MBS are down.

The economy added 57,000 jobs in June, according to the latest Employment Situation Report. The unemployment rate fell to 4.2%, while the labor force participation rate declined form 65.8% to 65.5%. The two month revision was -74,000. Average hourly earnings rose 0.3% MOM and 3.5% YOY.

The labor force fell by roughly 700k, while the number of people with jobs fell by 500k and the number of unemployed fell 200k. So while the unemployment rate fell, it appears that is being driven by people exiting the labor force.

Overall, this is not a great report, and bonds yields are declining slightly. I don’t think this moves the needle for the Fed given that inflation is still above their target, the economy is adding jobs, and the unemployment rate remains historically low.

The manufacturing economy decelerated in June, according to the ISM Manufacturing Report. New orders and production declined, however inflation moved markedly lower. Employment improved.

“In June, U.S. manufacturing activity remained in expansion territory, growing at a slightly slower pace as compared to the month before. Of the five subindexes that make up the PMI^®, the New Orders and Production indexes grew slower as compared to the previous month, the Supplier Deliveries Index slowed at a slower rate, and the Employment and Inventories indexes improved with the latter entering expansion territory.

“In June, 34 percent of the comments were positive and 66 percent negative, with a 1-to-1.9 ratio of positive to negative sentiment. Among negative comments, the Iran war was mentioned in 31 percent and tariffs in 17 percent; 50 percent of the panelists mentioned pricing volatility as an issue for their companies.”

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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

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Announced layoffs fell in June, according to the Challenger and Gray Job Cut Report. Job cuts fell 53% from the prior month, and are down about 4% on a YOY basis. AI was the reason for most of the job cuts.

Technology led all sectors: “Tech remains the epicenter of this year’s cuts. AI is the dominant force as companies are restructuring around it, automating roles, and reallocating budgets toward new capabilities. The sector is being reshaped in real time,” said Challenger.

Stocks are lower after closing out a blockbuster quarter. Bonds and MBS are down.

Home prices were flat MOM and rose under 1% YOY according to the Cotality Case Shiller Home Price Index. The hip to be square trade continues, with the Midwest and Northeast posting the biggest gains while the Sunbelt and the West are posting declines. As inflation is running close to 4%, we are seeing home prices fall in real, inflation-adjusted terms.

“April’s figures confirm that U.S. home prices remain essentially flat, with the S&P Cotality Case-Shiller National Home Price Index up a scant 0.8% year over year, just above March’s 0.7% pace… With inflation accelerating to 3.8% in April, U.S. home values have now declined in real terms for an 11th straight month, further eroding inflation-adjusted housing wealth….The affordability pinch remains a key headwind. After dipping below 6% earlier this year, 30-year mortgage rates climbed back to 6.3% in April, keeping financing costs elevated. In this higher-rate environment, home price growth remains constrained, with housing largely treading water in nominal terms and falling in real terms.”

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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

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Consumer confidence improved in June according to the Conference Board. Most of these consumer confidence surveys are really just gasoline price surveys, as that appears to be a big driver of confidence in general. The Present Situation index declined, however expectations improved. Consumer views of the labor market darkened.

“Consumer confidence inched up in June as falling oil prices in recent weeks provided some relief to consumer inflation fears,” said Dana M Peterson, Chief Economist, The Conference Board. “Consumer appraisals of current business conditions were slightly more positive compared to last month. However, perceptions of the current labor market softened measurably as the percentage of consumers saying jobs were ‘hard to get’ rose to 22.5%, the highest level since January 2021 (22.8%). Moreover, consumers anticipate little change in the labor market six months from now. This was offset by improving expectations for business conditions and incomes.”

Inflationary expectations eased, with expectations still above 5%. Note that inflation expectations have generally been quite a bit higher than actual inflation rates:

Is that a problem with consumers? Or the way the inflation indices measure inflation?

Job openings improved to 7.6 million, according to the JOLTS job openings. Notable increases were seen in manufacturing, trade transportation & utilities, and professional / business services. Government was flat. Finance fell, as did leisure / hospitality and health care / social assistance. The quits rate was steady at 1.9%.

Mortgage applications were flat last week as purchases increased 1% and refis fell 1%. “Mortgage rates eased slightly last week as oil prices declined. As a result, mortgage applications increased modestly, with an uptick in purchase activity offsetting a smaller decline in refinances,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications remain ahead of 2025’s pace and have exhibited year-over-year growth for almost three months, as prospective homebuyers are finding opportunities in markets with ample inventory and easing home-price growth. ARM loans accounted for less than 8% of applications, the lowest share since January, as the yield curve continues to flatten with relatively higher short-term rates.”

Stocks are higher as we round out an exceptionally strong quarter for equities. The NASDAQ is up some 20%. Bonds and MBS are flat.

The national delinquency rate rose 15 basis points in May, according to the ICE First Look. Part of this was due to a statistical anomaly. Overall DQ rates rose 4.5% MOM, which is in line with historical seasonal trends.

“While the headline increase in delinquencies may draw attention, the underlying performance picture is stable as delinquencies remain below January 2020 levels,” said Andy Walden, Head of Mortgage and Housing Market Research at ICE. “The rise in early-stage delinquencies and the month-over-month decline in cures were largely driven by the Sunday month-end, which causes many mortgage payments to be processed the following business day. The more important trend to watch remains the continued growth in serious delinquencies and active foreclosures, particularly among FHA loans.”

Long-term delinquency rates and foreclosure starts improved, while prepays slowed.

New York City froze rents for rent-controlled apartments. This won’t affect non-rent controlled apartments, so this should be irrelevant for most DSCR loans. That said, this move demonstrates a hostility to real estate investors that lenders are sure to notice. We do see some DSCR aggregators who won’t lend in the 5 boroughs.

The Supreme Court ruled that Trump cannot fire Fed President Lisa Cook over mortgage fraud allegations. Writing for the majority, Chief Justice John Roberts contended that, if the Trump administration were correct, it “would in effect transform the Federal Reserve’s for-cause protection into at-will employment—an interpretive leap out of step with the statute Congress enacted and our Nation’s tradition of central banking protected from political interference.”

This ruling gives new Fed Chairman Kevin Warsh more leeway to hike rates if need be.

Stocks are higher this morning on good news from the Iranian situation. Bonds and MBS are flat.

This week is relatively busy despite markets being closed on Friday and an early close on Thursday. We will get home price data on Tuesday, with FHFA and Case Shiller along with job openings. The jobs report will be released on Thursday morning, and Kevin Warsh will speak on Wednesday at the ECB Forum and we will get the ISM Manufacturing report along with ADP jobs data.

Consumer sentiment improved in June, driven by falling gasoline prices. “Consumer sentiment confirmed its early-month reading, rising about 10% above May as gas prices moderated. Increases were seen across income, wealth, and political affiliation. Expected business conditions over the next five years surged 16% as consumers’ worries over long-term consequences of the Iran conflict appear to be easing. Still, sentiment remains in unfavorable territory at 13% below the February 2026 reading prior to the start of the Iran conflict, and nearly 20% less than a year ago. The cost of living remains at the forefront of consumers’ minds; for the third straight month, over half of consumers spontaneously mentioned that high prices are weighing down their personal finances.”

Year-ahead inflation expectations moderated to 4.6%, while long term expectations decreased markedly from 3.9% to 3.3%.

Minneapolis Fed President Neel Kashkari says he expects the Fed to hike the Fed Funds rate by 25 basis points this year. “In March, I had penciled in one rate cut by the end of the year. In June, I’ve changed that to one rate hike by the end of the year,” the policymaker said during a panel discussion at the Aspen Ideas Festival. “It’s a pencil, and so we’re going to have to see how the data comes in.”

Kashkari believes that rising energy prices have lifted inflation enough that a hike is probably necessary, and the recent decline probably won’t be enough to forestall that. “The inflation is being driven by supply dynamics, so whether it’s tariffs pushing up the price of goods that we buy from abroad, it’s the fertilizer that’s been disrupted because of the Strait of Hormuz and energy and oil prices from the Strait of Hormuz,” he said. “Then it’s also being driven by massive investment, hundreds of billions of dollars a year into data centers and all of the associated infrastructure that goes with that. Anything that touches those sectors, the prices are skyrocketing on those parts of the economy.”

It looks like this year’s Spring Selling Season was more or less a dud, with the Iran War introducing uncertainty and dampening sentiment. The bright spots in the market are the Bay Area, which is being positively impacted by AI demand and jobs, the Northeast which is part of the hip-to-be-square trade and pockets of the Midwest. The Sun Belt continues to struggle, although that is still where people are choosing to relocate.

Stocks are lower this morning on no real news. Bonds and MBS are up small. Korean stocks sold off 9% overnight.

First quarter GDP rose 2.1% in the third revision, an increase of from the 1.6% second estimate. Imports were revised downward, while investment was increased. Consumer spending was revised downward as well. IT and federal government spending (Iran) were the biggest positive contributors to GDP.

In other economic news, durable goods orders fell 4.5%, while capital goods orders rose 1.6%. The Chicago Fed National Activity Index declined and initial jobless claims fell to 215k.

After the inflation print yesterday, the Fed funds futures became slightly more dovish. The most likely outcome for the year is that the Fed funds rate will be 25 basis points higher. The second most likely outcome is 50 basis points, and the third is no change.

Austan Goolsbee said that inflation is “going the wrong way” while John Williams sees it trending lower and is happy with the current level of interest rates.

Austan Goolsbee said: “You have seen now little bit of improvement on this services inflation, and I’ve been identifying that as something that we would want to see,” Goolsbee said from the trading floor of the Cboe. “But right now, as between the two sides of the Fed’s mandate, the inflation side and the job market side, clearly the problem’s on the inflation side.”

John Williams said: “Given the elevated level of inflation, it is imperative that we restore it to our 2 percent longer-run goal on a sustained basis,” Williams said in remarks at the Crane Money Fund Symposium in Jersey City, New Jersey. “The current stance of monetary policy is well positioned to do that.”

Williams thinks that the effect of tariffs is waning, and if we end up with some sort of durable solution in Iran energy prices will decline. Finally rental inflation seems to be slowing which is positive for lower shelter inflation.

Speaking of shelter inflation, single family rent growth is decelerating according to Cotality. Single family rents increased 1.4% YOY in April, compared to an increase of 2.8% in April of 2025. The hip-to-be-square trade continues, with Chicago seeing 5.5% growth while the Sunbelt is seeing YOY declines.

“Single-family rent growth has shifted into a slower gear, with annual gains continuing to ease even as monthly increases remain in line with typical seasonal patterns. Since Fall 2025, annual rent growth has held within a narrow range of about 1% to 1.5%, signaling that the market has settled into a more stable phase after the sharper deceleration seen earlier,” said Molly Boesel, senior principal economist at Cotality. “Growth continues to diverge by segment and region, with higher-priced rentals still outperforming lower-priced homes. Regionally, Midwestern and Northeastern markets such as Chicago, Philadelphia, and New York are driving stronger gains, with Chicago up 5.5% year over year, while some Sun Belt markets, including Miami and Los Angeles, are flat or declining. With annual gains remaining subdued and fewer markets posting declines, rent growth appears to be holding steady at a low level rather than building momentum going forward.”

Stocks are higher this morning after good numbers from Micron. Bonds and MBS are down small.

Personal incomes rose 0.7% MOM in May, according to BEA. Personal spending increased 0.7% as well. The PCE price index rose 0.4% MOM, while the core (excluding food and energy) rose 0.3%. On a YOY basis, the headline inflation rate rose 4.1%, while the core rose 3.4%. All of these numbers were in line with Street expectations.

The ROAD bill, which passed Congress with overwhelming support, is stuck at Trump’s desk. He wants Congress to pass the Save America Act, which targets election integrity and requires voter ID. The bill has been passed in the House, but remains stuck in the Senate. Democrats are united against voter ID, which means it cannot garner the 60 votes necessary to pass it in the Senate. Trump would like to see it passed under reconciliation, which requires only 51 votes. Reconciliation is supposed to be used only for budget items, not legislation.

The ROAD bill does some good stuff with manufactured homes, but really is mainly a messaging bill which is why it was passed so easily. The Federal government can’t do much more than jawbone local jurisdictions about regulatory burdens, and the institutional investor ban is a feel good measure that will have limited impact on home prices. In fact, the seven-year sale requirement for build-to-rent introduces a constraint on that business, which mathematically means you will get less of it.

New home sales fell 6.8% YOY to a seasonally adjusted annual rate of 580,000 units in May, according to Census. At the end of the month, there were 496,000 homes for sale representing a 10.4 month supply. As we saw in KB’s earnings release, new homes are oversupplied and builders are cutting prices. The median sale price was 424,900, unchanged year-over-year.

As any capital markets guy knows, aggregators have an insatiable appetite for non-QM loans, as every Tom Dick and Harry gets into the business. Non-QM issuance is up some 81% in the first 5 months of 2026, according to banking expert Chris Whalen. DSCR loans are up almost 100%.

One of the truism about markets is that as more players enter a space, more and more marginal investments are made. No-ratio DSCR loans are common, although there is increased scrutiny on collateral. This is an area to watch, especially since the private equity stocks are getting beaten up again as investors fret about Q2 redemptions.

Stocks are higher this morning as the tech sell off takes a breather. Bonds and MBS are up.

US business activity improved for the fifth straight month in June, according to S&P Flash PMI report. The initial decline in sentiment driven by the Iran War seems to be fading, and output is rising. That said, companies are cautious about hiring plans and increased prices remain a concern. Manufacturing improved more than services, however manufacturing employment is not keeping up.

“Brighter news out of the Middle East has helped restore some confidence among US businesses in June, though the overall rate of economic growth signalled by the flash PMI survey remains relatively sluggish compared to that seen earlier in the year in the lead up to the conflict. The survey signals that current output levels are consistent with the economy struggling to grow much faster than a 1% annualized rate in the second quarter.”

The comment about GDP growth is odd. The Atlanta Fed GDP Now Model sees 3% growth in Q2 and the consensus estimate for the Street overall is about 2.3%. A 1% projected growth rate out of S&P is an outlier.

Congress passed the ROAD Act on Tuesday, which sends the bill to Trump to sign. The bill’s main provision limits institutional ownership of single family rental houses, and aims to attach regulations which add to the cost of building a home. Will this help builders? Maybe. Most of the regulations which stymie homebuilders are local, which means the Federal Government can do little. Trump can tell New York to ease regulations until he is blue in the face, but that is about all he can do.

Homebuilder KB Home reported earnings that were in line with Street estimates, although the actual numbers were pretty dismal overall. Revenues fell 27% on a YOY basis (YOY is the only comparison that matters for builders), while deliveries fell 23%. Gross margins fell from 19.3% to 15.2% while average selling prices declined from $488,700 to $461,900. KB upped their guidance for the rest of the year, which cheered the Street somewhat. The stock is up about 4% pre-open.

Mortgage applications rose 1% last week as purchases fell 1% and refis increased 3%. “Mortgage rates changed little over the course of last week, despite the more hawkish tone from the FOMC at its June meeting,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Purchase application volume edged slightly lower, while refinance activity posted modest gains. Despite the elevated mortgage rates and overall economic uncertainty, mortgage application volume is running 8 percent above year-ago levels.”

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

The Senate passed the ROAD act yesterday, which hopes to help address the housing affordability issue. The vote was 85-5, which is about as bipartisan as it gets these days. The bill limits institutional investors which hold 350 properties from increasing their portfolios, but does not require them to divest. Build-to-rent investors will have to offer the properties to the public after 7 years. There are also carve-outs for new construction.

The bill also aims to reduce red tape by streamlining environmental reviews. It also includes incentives to make small-dollar mortgages a breakeven proposition for lenders. It expands the box for manufactured housing and allows community banks to increase their portfolios of public welfare investments.

FWIW, the institutional investor limit is more messaging than anything, but companies like Blackrock have few friends these days and are probably better sellers than buyers of single-family properties anyway. Which means there isn’t much pushback.

Alan Greenspan (the Maestro) died yesterday a 100. Greenspan was considered a god by the business press during the late 1990s as the stock market rallied to new highs. Greenspan has a complicated legacy – he was best known for committing to provide liquidity in the aftermath of the Crash of 1987, which was considered a good move at the time. Unfortunately, he went to the well many times after that, cutting rates every time Wall Street hiccupped, from the Asian crisis to the Long Term Capital Management collapse. He even injected massive amounts of liquidity into the market ahead of Y2K.

This behavior became known as the Greenspan Put, which represented the idea that the Fed would come to the rescue any time markets struggled. Greenspan was credited with aiding and abetting the late 1990s stock market bubble and the 2006 residential real estate bubble. Greenspan’s exit was propitious, slipping out the door just as the 2006 residential real estate bubble peaked, leaving Ben Bernanke to deal with the fallout when it all blew up two years later.

Of course Greenspan’s bubbles were primarily the result of the dual mandate, which tells the Fed to manage inflation while also ensuring full employment. It was well-intentioned and was a product of its time, when the Fed was fighting double-digit inflation during a period 7.5% unemployment. The unintended consequences reared their ugly head in the 1990s. As the Fed attacked unemployment, goods and services inflation remained in check courtesy of imported deflation from Japan. Low rates, the Greenspan Put, and the promise of the Internet was the perfect storm for a stock market bubble.

After the stock market bubble burst, Greenspan cut rates again, which helped fuel the residential real estate bubble of 2005 and 2006. The problem with the dual mandate was that it considered goods and services inflation (too much money chasing too few goods) as a problem, but didn’t contemplate asset inflation (too much money chasing too few assets). Greenspan’s commitment in the aftermath of the 1987 stock market crash may have been helpful, but the behavior it encouraged was anything but.

This behavior was not limited to Greenspan – Jerome Powell pulled out the Ben Bernanke playbook during COVID, treating a temporary pandemic shutdown like a burst residential real estate bubble, buying trillions of dollars of MBS and sending house prices up 20% in 2022. This is directly responsible for the affordability crisis we see today.

Stocks are lower this morning as negotiations with Iran in Switzerland get off to a rocky start. Bonds and MBS are down. Iran has closed the Strait of Hormuz after fighting in Lebanon continues. The situation remains fluid however.

This week will be dominated by the Personal Incomes and Outlays report, which will contain the PCE Price Index – the Fed’s preferred measure of inflation. We will also get new home sales and consumer sentiment. We will also hear from Austan Goolsbee and John Williams. Homebuilder KB Home will report earnings as well.

The Index of Leading Economic Indicators improved in May, according to the Conference Board. As has been the case for the past few months, the big drivers of the increase have been financial indicators – things like the S&P 500 and bond yields. The biggest negative has been consumer expectations. Most of the hard economic indicators were more or less flat.

“The Leading Index for the US increased slightly in May, fueled entirely by positive contributions from financial components, especially stock prices and the interest rate spread,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “On the non-financial side of the LEI, only ISM® New Orders Index showed some strength, with consumer expectations remaining a major drag. Despite two consecutive monthly increases, the LEI’s six- and twelve-month growth rates were still negative, suggesting slower economic expansion ahead. Consumers are feeling squeezed because everyday costs—especially gas and energy—are rising faster than their incomes, leaving many households with less money available for things like travel, restaurants, entertainment, and shopping. The good news is that businesses are spending heavily on AI, data centers, and new technology, helping to keep the economy growing, while consumers pull back spending. The overall job market is expected to stay fairly healthy in 2026, but economic growth will be weaker than in recent years. The Conference Board is currently projecting 1.8% y/y GDP growth in 2026, down from 2.1% in 2025.”

Homeownership affordability is more than just mortgage rates and home prices. Things like insurance, taxes, HOA fees and maintenance also account for an increasing portion of the monthly payment. These ancillary pieces have been increasing faster than P&I payments for years. HOA fees overall have increased 85% since 2019. Homeowner’s insurance fees are up 72% over the same period.

The total annual bill for homeownership has increased 39% over this period from $20,618 to $28,596. Over the same period, the CPI is up 26%.