The Daily Tearsheet

Stocks are flattish as we await the Fed decision. Bonds and MBS are down small.

The Fed decision is due at 2:00 pm EST today. Kevin Warsh will hold a press conference afterward. The market is looking for a hawkish pause, where the Fed maintains policy but signals further hikes ahead.

New Home Sales fell 0.6% MOM and 5.3% YOY to a seasonally adjusted annual rate of 680,000 units. At the end of September, there were 476,000 new homes in inventory, which represents a 8.4 month supply. The median new home price fell 3.9% YOY to $400,400.

The inventory of new homes for sale is still elevated:

Housing isn’t going to be much of a contributor to GDP growth until some of this inventory gets worked off.

Microsoft is offering buyouts to about a quarter of its global workforce – 60,000 employees in all. The company is expected to report earnings today. Capital expenditures for AI are taking a toll on the company’s finances, so it is cutting its workforce aggressively. I wonder if Microsoft is the first salvo in tech downsizing. If so, we could see the labor market break out of its low hire / low fire equilibrium and weaken.

Home prices rose 2.1% YOY according to the Case-Shiller Home Price Index. The hip-to-be-square trade continues with Chicago seeing the biggest gains and Seattle seeing the biggest losses. Real, inflation-adjusted home prices continue to decline, however affordability remains stretched as incomes haven’t caught up with the 2022 spike in prices and mortgage rates continue to work their way higher.

Mortgage applications rose 3.4% last week as purchases rose 4% and refis rose 3%. “Mortgage rates declined for the second week in a row, with the 30-year fixed rate decreasing to 7.37 percent, the lowest in three weeks. The decline in rates gave borrowers some relief, with applications rebounding slightly, particularly conventional applications,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Mortgage rates are still more than a percentage point higher than the same week last year and most homeowners still have rates much lower than prevailing market rates. The ARM share of applications increased to 11.3 percent, the highest level in more than a year, as more borrowers applied for ARM loans to lower their monthly payments.”

Purchase applications are down 18% YOY while refis are down 60%.

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During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.

A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration risk, which refers to a loan’s expected life and its interest rate sensitivity.

During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an acceptable bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit accordingly. Does that mean that the hedges didn’t work? Not necessarily.

Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):

Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices

The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.

Below I looked at how Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7-year, the 7.5 had a 5-year, and the 8 had a combo of 5s and 2s.

The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points. An important note about duration and extension risk: Duration is not a set-it-and-forget-it number. It changes with rates. This is what happened to the lower coupons. They might have a duration of 10 years with the 10 year at 4.8% and a much longer duration when the 10 year hits 5.3%.

Like any mortgage backed security, non-QM loans have negative convexity and therefore hedged portfolios will be vulnerable to interest rate shocks. Non-QM loans are hedgeable, but they have to be handled differently than conforming loans.

If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas john.douglas@erisfutures.com or Geoffrey Sharp geoffrey.sharp@erisfutures.com at Eris Futures.

Stocks are higher as we begin the FOMC meeting. Bonds and MBS are up small.

The Fed begins its meeting today. The Fed Funds futures are signaling basically a hawkish pause, where no changes are made this month and a hike comes in December. The futures see only a 8% chance of hike tomorrow, but a 79% chance of a hike in December. The proximity to the midterm election is an optics issue and hiking rates will be treated as political, whether it is or not.

The economy accelerated in September according to the Chicago Fed National Activity Index (CFNAI). This is sort of a meta-index of a broad base of economic indicators which gives a 30,000 foot view of the economy. Production-related indicators drove the increase, while consumption and housing were a drag. I suspect this was mainly due to housing, as retail sales were pretty decent and the consumer has been a bright spot in the economy. Employment and sales indicators had marginal effects on the index.

Anthropic filed the S-1 for its IPO yesterday. It certainly makes interesting reading. The market thinks this is a $1.5 – $2 trillion company, with about $19.7 billion in trailing 12 month revenues. There are some 5 different classes of stock as well.

The risk factors section, which usually contains every imaginable risk, has a new one to me at least: “Concerns have been raised advanced AI systems could pose catastrophic or existential risks to humanity”

I have heard of all sorts of ways an investment can blow up, but being an existential risk to humanity is a new one. I can imagine the lawyers discussing whether this should go in the risk factors. “I’m telling ya, Jake, if we blow up humanity and we didn’t disclose it in the prospectus, I don’t even want to think about what the SEC is gonna do to us, let alone Robbins Geller.”

Delinquencies for commercial mortgage backed securities increased in the third quarter, according to the MBA. 4.97% of the loans backing CMBS were delinquent in Q3 compared to 4.82% in Q2. “Overall, delinquency rates for commercial mortgage loans increased modestly in the third quarter. Challenging fundamentals, particularly in the multifamily and office markets, along with higher rates, are having an impact on performance,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “However, delinquency rates remain historically low across most capital sources. The large number of scheduled maturities coming due amidst the recent spike in interest rates will continue to be a headwind for commercial mortgage performance in the quarters ahead.”

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During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.

A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration risk, which refers to a loan’s expected life and its interest rate sensitivity.

During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an acceptable bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit accordingly. Does that mean that the hedges didn’t work? Not necessarily.

Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):

Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices

The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.

Below I looked at how Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7-year, the 7.5 had a 5-year, and the 8 had a combo of 5s and 2s.

The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points. An important note about duration and extension risk: Duration is not a set-it-and-forget-it number. It changes with rates. This is what happened to the lower coupons. They might have a duration of 10 years with the 10 year at 4.8% and a much longer duration when the 10 year hits 5.3%.

Like any mortgage backed security, non-QM loans have negative convexity and therefore hedged portfolios will be vulnerable to interest rate shocks. Non-QM loans are hedgeable, but they have to be handled differently than conforming loans.

If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas john.douglas@erisfutures.com or Geoffrey Sharp geoffrey.sharp@erisfutures.com at Eris Futures.

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

The week ahead will be dominated by the FOMC meeting on Tuesday and Wednesday. Just after the meeting, we will get inflation data with the personal incomes and outlays report. Other than that we will get new home sales and home prices. We will get earnings from Invitation Homes, Meritage, D.R. Horton, Rocket, and PennyMac. Finally, we will have rate decisions from the ECB and the BOJ which will impact rates.

Market bellwethers such as Google, Amazon and Microsoft will also report this week.

As we head into Fed week, the markets are overwhelmingly predicting no change in interest rates. The Fed Funds futures see only a 9% chance of a rate hike this week. Given the proximity to the midterms, the easy choice is to do nothing.

Consumer sentiment was flattish in October, according to the University of Michigan Consumer Sentiment Survey. Expected business conditions improved while buying conditions for durable goods fell. Inflation expectations for the year ahead rose to 4.7% from 4.6% while long-term expectations bumped up from 3.4% to 3.5%.

Overall consumer sentiment is about 10% lower than it was a year ago and 15% below where it was in February before the war in the Persian Gulf began.

Business activity is at a 5 year high, according to the S&P Flash PMI. “October’s flash PMI data indicate that the US economy continues to boom at the start of the fourth quarter. The output readings from the survey are consistent with GDP growing at a 5% annualized rate after a 4% expansion was signalled for the third quarter. Especially healthy corporate earnings and profits are also indicated, and hiring has surged as companies seek to boost capacity to fulfil stronger customer demand.

If the reopening of the economy after COVID is excluded, recent months have seen the best growth spell for US businesses since early 2015. However, cost pressures remain a key concern, notably as the renewed surge in oil prices reverberates through to impact a wide variety of goods and services. Supply chain bottlenecks have meanwhile intensified, and order book backlogs are growing, making it easier for companies to pass higher costs on to customers. The result is the sharpest increase in selling prices for over four years to a pace that indicates consumer price inflation is likely to rise further above the Fed’s target in the coming months.”

Stocks are lower this morning although the sell-off in tech appears to be taking a breather. Bonds and MBS are down small.

The problem children in the global market are behaving this morning. The French OAT has a yield of 5.05%, just off its highs, while the Korean stock market managed to eke out a small gain in a late day rally. Oil is higher as the Iranians say they are ready to attack civilians and economic targets.

The index of leading economic indicators was flat in September after declining slightly in August. “The US LEI was flat in September. However, due to an upward revision to July’s data, the Index is at a higher level than last month’s report for August,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Five out of ten components made positive contributions to the LEI in September, led by the interest rate spread and average weekly hours in manufacturing. Nevertheless, these gains were offset by a large decline in consumer expectations and much smaller negative contributions from stock prices, new orders for capital goods and building permits. The LEI’s six-month growth rate increased slightly, which suggests the economy is still growing and will continue to grow, but is becoming less dependent on consumer spending and more dependent on business investment. The Conference Board now expects real GDP to grow by a 2.2% annualized rate in 2026, with our outlook for 2027 at 2.0%, higher than previously forecasted.”

The biggest negative contributor was consumer sentiment (which is often a proxy for gasoline prices) while the biggest positive contributor was the sell-off in the bond market. A sell-off in the bond market means a steeper yield curve, which is often a signal that the economy is getting stronger.

Mortgage REIT Rithm Capital reported earnings per share of $0.39, an increase from $0.04 per share last quarter on a GAAP basis. On a non-GAAP basis EPS fell from $0.60 to $0.55. RTL (residential transitional loans i.e. fix and flip, ground up construction) continues to grow through its Genesis platform. Rithm did its first securitization of RTL loans this quarter.

New Rez saw volume decrease 21% YOY to $12.9 billion. Gain on sale margins were relatively steady at 139 bais points. Rithm bought $1.5 billion on NQM loans for its portfolio and did a couple securitization. The company continues to purchase MSRs.

“Rithm’s strong third quarter results reflect disciplined execution across every part of our platform,” said Michael Nierenberg, CEO of Rithm Capital. “We continued to scale our asset management business, closing new funds and growing a more durable, fee-based earnings stream, while our operating companies delivered: Newrez generated a 24% annualized operating return on equity⁽³⁾, Genesis reached year-to-date originations of $5.0 billion, and Elecor expanded its third-party capital base by executing a joint venture for a core NYC property, while signing 320,000 square feet of new leases. Our businesses continue to perform, and the strength and breadth of our platform position us well as we enter the fourth quarter with significant momentum and opportunity ahead for our shareholders, clients, and partners.”

Stocks are lower as the tech sell-off continues. Good numbers out of Meta and Tesla aren’t enough to pull markets up. Bonds and MBS are rallying.

Just like the bond selloff was global, so is they bond rally. Bunds and Gilts are seeing lower rates. Bucking the rally is the French OAT which now yields 5.1%. MBS seem to be taking this rally with a grain of salt. So far mortgage rates are reluctant to follow the 10 year lower. The recent rally in bonds has recaptured about 25 basis points of the roughly 50 basis point increase since the beginning of September.

Initial jobless claims fell to 194k. The labor market continues to be robust.

Homebuilder Pulte reported earnings this morning of $2.53 per share. Revenues fell 9% and gross margins contracted 140 basis points to 24.8%. New orders fell 6% in units. “The rapid increase in interest rates has stretched affordability even further, made selling an existing home even harder, and has pushed even more consumers to the sidelines,” added Mr. Marshall.“Within this environment, we continue to appropriately balance the price and pace of home sales, align production accordingly, and remain disciplined in our allocation of capital.”

Move-up and active adult now account for over 60% of deliveries, which are the more profitable sectors.

Northpointe announced that it is selling its distributed retail and consumer direct business to CMG Financial, with the transaction expected to close by the end of the year. “Given today’s economic and operating environment, and the continued evolution of the mortgage distribution channels, we are refocusing our strategic priorities where we have the strongest competitive advantages,” Williams continued. “This allows us to deepen client relationships, generate attractive portfolio assets, and grow relationship-based deposits, which we expect will improve operating leverage, capital efficiency and create a more robust, stable and scalable earnings profile…We believe CMG would be a strong home for our origination team and a constructive path for our customers, referral partners and team members,” Williams concluded. “We remain highly committed to the mortgage banking industry, and believe allocating capital and resources to our businesses with the strongest client relationships and balance sheet opportunities provide us the best path forward for long-term growth and shareholder returns.”

Single family rents rose 2% in August according to Cotality. This is the sixth consecutive month of of YOY increases. “August marks an important milestone for the rental market,” noted Molly Boesel, senior principal economist at Cotality. “Annual single-family rent growth returned to its long-run range, albeit at the lower end, for the first time since August 2025, and the number of markets experiencing rent declines fell to its lowest level since September 2023.”

The hip-to-be-square trade continues, with MSAs like Chicago, Philly and NY experiencing the biggest increases while Florida and Texas saw more modest growth.

Stocks are higher this morning after SpaceX earnings. Bonds and MBS are up small. Not sure what caused oil to spike yesterday, but whatever it was, it is over.

As the air comes out of the AI stock bubble, Treasuries seem to be benefiting.

Housing starts fell 5.2% MOM and 11.5% YOY to a seasonally adjusted annual rate of 1.22 million units. The Street was looking for 1.3 million so this is a sizeable miss. Building permits were roughly flat MOM to 1.4 million units. Housing as an economic contributor continues to punch below its weight:

We will hear from a couple of homebuilders this week, and from the sound of it we will continue to see compressing gross margins as they cut price to move the inventory. I am not sure that offering below-market mortgage rates as a way to maintain the comps will work with rates up here. They probably will have to cut price, especially in developments where there are now existing homes coming for sale at lower price points.

Rising rates are impacting pending home sales as well, which fell 7.3% according to NAR. “Market conditions weakened in September due to fast-rising mortgage rates,” said NAR Chief Economist Dr. Lawrence Yun. “Although job growth and income gains can support home purchases, housing affordability is more affected by changes in mortgage rates. Given that mortgage rates have already risen much more than the Federal Reserve’s short-term interest rate hikes, mortgage rates could be topping out. Despite the difficulty of obtaining a mortgage, the limited number of distressed properties is ensuring steady home prices. Buyers and sellers may simply be holding back until mortgage rates move favorably.”

From Yun’s mouth to God’s ears about mortgage rates. As the 10 year stabilizes and bond market volatility eases we should see a tightening of MBS spreads which would move rates lower.

Mortgage applications fell 5.3% last week as purchases fell 7% and refis fell 2%. “Mortgage rates decreased for the first time in over two months, with the 30-year fixed rate dropping to 7.41%. However, lower rates were not enough to boost application activity, as both purchase and refinance applications continued to decline,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Purchase applications fell 18% behind last year’s pace, as higher rates are pricing buyers out of the market. The ARM share held steady at 10.5%, as ARM rates remained almost a full percentage point lower than the 30-year fixed rate, giving qualified borrowers a lower rate option to purchase a home.”

Mortgage REIT Annaly Capital reported a 11% decrease in book value per share as MBS spreads widened in Q3. “While the third quarter of 2026 was a challenging period for fixed income markets, which we were not immune to, we entered the quarter prepared for the volatility. Our cycle-low leverage and minimal duration exposure provided us with the flexibility to actively manage our portfolio while continuing to make attractive investments across our three strategies,” remarked Chief Executive Officer & Co-Chief Investment Officer David Finkelstein.

Annaly reported that AAA non-QM spreads widened out about 10 basis points during the quarter. They continue to build their servicing portfolio and are valuing it at 6.15x. MSR valuations have continued to march higher.

Western Alliance reported better than expected earnings of $2.45 per share. Credit performance was particularly strong, with nonaccrual loans falling 14% to 0.79% of loans held for investment. Revenues rose 1.9%.

Mortgage origination volume fell 4% YOY to $14.5 billion. Gain on sale margins of 27 basis points were flat QOQ and down 2 bps from last year.

Stocks are lower this morning as chip stocks get hit and oil spikes. Bonds and MBS are flattish.

Homebuilder sentiment fell to a 14 year low last month on rising interest rates. “Housing remains squeezed by supply-side constraints and significant affordability challenges,” said NAHB Chief Economist Robert Dietz. “Demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines. As a result, buyer traffic has fallen to its lowest level since April 2012, excluding the pandemic’s onset in April 2020.”

Agency mortgage REIT AGNC Investment reported Q3 earnings and unsurprisingly was dinged up by the carnage in the bond market at the end of September. Book Value per share dropped by 17%.

“Fixed income markets experienced significant pressure in the third quarter, particularly in the final weeks of September, as fixed income investor sentiment turned decidedly bearish, interest rates increased sharply, and interest rate volatility spiked,” said Peter Federico , the Company’s President, Chief Executive Officer and Chief Investment Officer. “The instability in the Treasury market drove pronounced weakness in the Agency MBS market, and, as a result, Agency MBS was the worst performing sector of the Bloomberg U.S. Aggregate Bond Index during the quarter. Consistent with this material underperformance of our underlying asset class, AGNC’s economic return on tangible common equity in the third quarter was -12.7%.

You can see how MBS spreads widened in the top chart. The bottom chart shows the spike in bond market volatility:

We will hear from Annaly today, and that should be a good read on what is going on in the non-QM space.

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I am attending the ABS East Conference this week which is an interesting event if you are a mortgage banker. The attendees are generally the big buy side firms like insurance companies and mutual funds, and the mortgage crowd are largely the big aggregators. Similar to the way capital markets folks will go to Secondary and talk with all of their correspondent partners, their correspondent partners go to ABS and talk to their buy-side partners. Investment bankers are well-represented to pitch their structuring and distribution skills.

ABS includes more then just mortgage – it includes asset backed securities, collateralized loan obligations, commercial MBS and other assets. FWIW, residential mortgage backed securities are the most attractive asset class to the buy side, at least according to polls taken there.

Generally buyers anticipate that rates will move a touch lower and spreads overall will tighten. They are waiting for the next shoe to drop with the consumer and are concerned about the K-shaped economy (K-shaped means the rich are doing well, but the middle class / poor are struggling).

Banks are full to the gills with data center debt and want no more of it. Commercial mortgages (especially office) remains a concern.

Stocks are higher this morning as tech stocks rebound. Bonds and MBS are flat.

The upcoming week doesn’t have much in the way of market-moving data, however we will get housing starts, NAHB homebuilder sentiment, and ISM data. We are in the quiet period ahead of the FOMC meeting next week, so there won’t be any Fed speakers.

Earnings season gets into full swing with numbers from AGNC Investment, Western Alliance, BOK Financial, Annaly, M/I Homes, Pulte, NVR, and Rithm.

The mREITs will be interesting given how much spreads have blown out. AGNC will be a bellwether on the buy-side interest for conforming mortgages, while Annaly and Rithm will shine some light on non-QM. Everything out there about new home sales indicates homebuilder earnings will be soft, with gross margins under pressure.

Industrial Production rose 0.7% in September. It was up 2.2% compared to a year ago. Manufacturing production rose 0.3% MOM and 1.1% YOY. Capacity Utilization ticked up to 76.9%.

The upper hand has shifted to home buyers, who have the most negotiating power since 2008. There are 63% more home sellers than buyers. The shift over the past 4 years is dramatic:

“This is a buyer’s market born out of caution, not strength,” said Asad Khan, a senior economist at Redfin. “Buyers have tremendous negotiating power in most of the country because so many other would-be buyers have been priced out of the market, or scared off by economic uncertainty. For house hunters who have the budget and job security to purchase a home in today’s market, that creates a unique opportunity: They can be picky, negotiate and even walk away if the deal doesn’t make sense financially or they find something they like better. The irony is that in terms of supply, these are some of the best conditions for buyers in many years–but they have arrived at a time when costs are so high that fewer people can afford to take advantage of them.”

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

Kevin Warsh spoke in Bangkok yesterday and declined to give any guidance on the upcoming meeting. He did praise the coordinated global tightening and said there were no “free riders.” The brutal sell-off in Treasuries has been mirrored in other global sovereigns including Bunds, Gilts, and JGBs.

On the subject of the next meeting, he said: “I don’t prejudge meetings. I don’t believe in saying now what I might do at the meetings that we have in the balance of this year. It’s a new chapter at the Fed [and] we’re not in that business anymore. But we can go in any direction you’d like.”

Warsh is simply returning the Fed to the pre-GFC norm, where the Fed did not spoon-feed the markets. Forward guidance was a tool the Fed used when deflation was a threat in order to prevent a liquidity trap and encourage consumers to spend. Deflation is no longer a threat in the West (thought it is in China).

Despite the hotter-than-expected PPI and CPI, the Fed Funds futures continue to discount the chance of a rate hike at the end of the month. The futures are pricing in a 15% chance of a hike. They still see a 90% chance of a hike in December however.

Global sovereign yields have taken a break from rising for the moment. The problem child – French OATs – is also stabilizing. The Merrill Lynch Bond Volatility Index is also falling which is important since volatility spikes cause MBS spreads to widen. If rates and volatility stabilize we should hopefully see mortgage rates closer to 7%.

The spike in yields has increased non-QM’s share of the market. ARMs are also reaching a multi-year high. “What stands out in September is how much product mix is doing the work of keeping purchase activity moving,” noted Brennan O’Connell, director of data solutions at Optimal Blue. “Conforming lost share while non-QM volume grew and ARM usage reached its highest level seen in our report. That tells lenders there is still purchase demand to serve, but increasingly it may not fit neatly into the traditional conforming box. In this rate environment, production opportunity is going to depend in part on how broadly lenders can meet borrowers across different credit, income and payment scenarios.”

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.”