The Daily Tearsheet

Stocks are higher this morning after Trump signed the Iran deal. Bonds and MBS are up.

As expected, the Fed maintained interest rates at current levels. The statement was much less verbose than a Powell statement. The meat of it was simply two sentences: “Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.” The vote was 12-0.

The FOMC revised upward their estimates for inflation with the headline number rising from 2.7% to 3.6% while the core rate was bumped up to 3.3% from 2.7%. Unemployment was revised down a touch as was GDP growth. The dot plot (who’s days are probably numbered) shows half the committee wants higher rates. Note Kevin Warsh did not submit a forecast for the dot plot, which is a signal that he plans to discontinue it.

At the press conference, Kevin Warsh announced the creation of five different task forces surrounding data sources, communication, inflation targeting, productivity and jobs.

The 10 year bond yield rose 5 basis points while the 2-year did increased 16 basis points. The Fed Funds futures moved even more hawkish, with the markets now predicting a 88% chance for rate hikes by the end of the year.

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Retail sales rose 0.9% MOM and 6.9% YOY in May according to the Census Bureau.

Pending home sales rose 3.8% in May, according to NAR. “A late spring buyer rush—even with mortgage rates not budging—is an indication of pent-up housing demand and consumers’ acceptance of above-6% mortgage rates as the new normal,” said NAR Chief Economist Dr. Lawrence Yun. “The inventory-constrained Northeast region, which has seen faster home price growth but slower home sales for several months, is now showing more buyer contract signings. More supply is needed to help moderate home price growth.”

“Going forward, falling oil prices will help lower mortgage rates,” Yun said. “But declines will be modest given sizable borrowing by the federal government and strong AI investment spending by tech companies.”

The Northeast and the Midwest saw the biggest increases in activity, while growth in the West and South was muted.

Stocks are higher this morning as we await the Fed decision. Bonds and MBS are up.

The Fed decision is due at 2:00 pm today. We will get a fresh set of projections and a new dot plot. Kevin Warsh will hold a press conference afterward. The market’s focus will be how close the Fed is to raising rates. The dot plot will be of critical importance.

At the March meeting, the consensus was rate cuts. A total of 7 members thought there should be no change, another 7 thought there should be one rate cut this year, and another 5 thought there should be two or more. The Fed Funds futures now forecast no rate cuts this year and are pricing in a 60% chance of at least one rate hike.

At the March meeting, the FOMC was predicting a core PCE inflation rate of 2.7% for 2026. At the time, core PCE inflation was 3.03% based on the February report. The Committee was thinking that the expiration of tariffs and a quick resolution to the Iranian situation would push core inflation back down to 2%. So far, that hasn’t been happening:

The new dot plot may be missing a dot: Kevin Warsh’s forecast. The new Fed Head is generally against the amount of talking the Fed does around interest rates. Fed transparency is a relatively recent phenomenon, which started in 2012 by Ben Bernanke when the Fed was fighting deflation in the aftermath of a burst residential real estate bubble. The point of the plot was to reassure markets that interest rates were going to stay low for the foreseeable future.

June 2012 dot plot:

Note the Fed forecasted ending ZIRP around 2014. The first rate hike didn’t end up happening until the December 2015 meeting. Also note that the Fed thought r-star (the neutral rate of interest) was above 4% back then.

Historically the Fed wanted to keep its intentions and deliberations secret in order to influence inflationary expectations. While past inflation is useful data, the Fed is interested in influencing future behavior and this can be a problem in an inflationary environment. If the Fed discloses what it thinks future inflation might be, consumers and businesses might front-load purchases which creates a self-fulfilling prophecy. If you want to lower future inflation, you would keep your forecasts to yourself. Transparency might have made sense in a deflationary spiral where the Fed wanted to create inflation (strange as that sounds). It generally isn’t helpful in an inflationary environment.

Mortgage applications fell 3.8% last week as purchases fell 3% and refis fell 5%. “Last week’s CPI data showed that inflation continued to move higher, putting upward pressure on rates early in the week, but growing optimism regarding the opening of the Strait of Hormuz brought rates down again by the end of the week,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “The net impact reduced mortgage application activity, with both purchase and refinance application volume down for the week by 3% and 5%, respectively. Purchase application continues to run modestly ahead of last year, with last week’s volume up 3% on an annual basis, with stronger growth in conventional purchase volume while government purchase volume remained subdued.”

Stocks are flattish this morning after digesting yesterday’s rally Bonds and MBS are flat.

The June FOMC meeting begins today – the first with new Chairman Kevin Warsh leading the charge. The markets don’t see any change in rates, but we will get a fresh set of economic projections and a new dot plot. Note that Kevin Warsh isn’t a big fan of all the disclosures. Old timers may remember when the Fed just put out a statement and that was the end of it. No press release, no dot plot. This stuff was instituted by Janet Yellen during the deflationary period in the aftermath of the real estate bubble.

The December Fed Funds futures see a 42% chance of no changes in the Fed Funds rate this year, a 42% chance of a 25 basis point hike and a 16% chance of 2 or more hikes. It is probably too early to predict how quickly energy prices revert to normal with the Strait of Hormuz re-opening but that will be the driver here.

Homebuilder sentiment remains low as affordability issues and excess inventory weighs on sentiment. The index fell two points to 35, which is a low we haven’t seen since 2011-2012. “Costly and inefficient regulatory policy is clearly impeding the ability of builders to increase the housing supply,” said NAHB Chief Economist Robert Dietz. “According to a new NAHB study, government regulation, taxes, fees and other costs add more than 26% to the price of an average single-family home. Easing permitting bottlenecks, density limits and inefficient zoning rules would help reduce costs and support the housing growth the nation needs.”

Indeed, sentiment is pretty lousy Part of the issue seems to be the hangover from the days of COVID and ultra-low interest rates:

Housing starts fell 15.4% MOM and 8.7% YOY to a seasonally adjusted annual rate of just 1.18 million units. This is the lowest number since the dark days of the COVID lockdowns. It was a big enough decrease that I suspect it will be revised away in later releases. We had been in a range of 1.3 million to 1.5 million since 2022. Building permits were roughly flat MOM and YOY at 1.41 million units.

Regardless, the numbers out of Lennar, builder sentiment and housing starts show that things are not great in the homebuilding sector. Despite the dour numbers, the stock market is sanguine. The S&P SPDR homebuilder ETF is defying gravity.

Industrial production rose 0.1% in May while manufacturing production was flat. Construction and business equipment, probably related to data centers, were the bright spot in the report. Capacity utilization inched up to 76.2%.

Markets are higher after Iran and the US have agreed to cease shooting and re-open the Strait of Hormuz. In a deal brokered by Pakistan, the US will remove its blockade and Iran will re-open the Strait. Negotiations will continue for 60 days on nuclear weapons.

Trump announced on social media: “Following intensive talks, we are pleased to announce that the Peace Deal between the United States of America and Islamic Republic of Iran has been REACHED,” said Shehbaz Sharif, the prime minister of lead mediator Pakistan, in a social-media post. “Both sides have declared the immediate and permanent termination of military operations on all fronts, including in Lebanon.”

Iran confirmed the deal as well: “The text of the memorandum of understanding has been finalized,” said Iran’s deputy foreign minister, Kazem Gharibabadi.

Oil is down substantially this morning, along with bond yields.

The week ahead will be dominated by the FOMC meeting on Tuesday and Wednesday. The forecast is for no change in monetary policy, however we will get a fresh set of economic forecasts and a new dot plot which has the potential to move markets.

Aside from the FOMC meeting, we will get homebuilder sentiment, housing starts and pending home sales. Markets will be closed on Friday for Juneteenth.

Consumer sentiment ticked up in June, according to the University of Michigan Consumer Sentiment Survey. The improvement was mainly due to falling gasoline prices. It is well known that consumer sentiment surveys are inversely correlated with gas prices.

“This month, consumer sentiment ticked up about four index points, or 9%, with consumers experiencing some relief due to the early-month easing in gasoline prices. This measured improvement in sentiment was widespread, seen across age, education, and political party. Lower-income consumers exhibited a particularly strong sentiment increase, consistent with the fact that gasoline comprises a larger share of their budgets. Overall, assessments and expectations of personal finances and business conditions all rose this month. Even with June’s early gains, however, views of the economy are still relatively dour. Sentiment is currently 13% below January 2026 and 19% below a year ago, as consumers remain focused on kitchen table issues. They feel burdened by the recent escalation in inflation and worry that higher inflation could remain stubborn going forward, particularly in the short run. Interviews for this release were completed between May 19 and June 8.”

Inflationary expectations decreased, with the year-ahead estimate falling from 4.8% to 4.6% and the longer-term expectation decreasing from 3.9% to 3.4%.

Options on SOFR futures begin trading today. Mortgage bankers who hedge non-QM portfolios or their MSR portfolio should take some time to understand how SOFR derivatives can hedge risk better than TBAs.

HUD released a proposed rule on Friday regarding manufactured homes. It will revise some definitions and amends the rules about chassis to permit multi-story manufactured homes. Given the affordability issues in the market, manufactured homes are a great way to provide affordable housing for the first time homebuyer. They are also improving in quality.

“America needs more housing, and manufactured housing is part of the solution,” HUD Secretary Scott Turner said in a statement. “We are removing unnecessary barriers, encouraging innovation, and helping American manufacturers deliver more affordable housing options for American families.”

Stocks are higher this morning after the SpaceX IPO got priced last night and on hopes of a resolution in Iran. Bonds and MBS are up small.

Oil is trading at the lowest level in 2 months.

Despite yesterday’s hideous PPI report, the markets took down their forecast for rate hikes this year. On Wednesday, the markets saw a 72% chance of a hike this year which is now 58%. Both the oil market and the Fed Funds market seem to have more optimism on Iran than the general public. Traders versus journalists, I suppose.

SpaceX priced its IPO last night at $135 per share. The ticker is SPCX. With Anthropic and Open AI waiting in the wings to go public, this will be a good test of the public’s appetite for IPOs.

Investors buying SpaceX are paying $1.77 trillion for a company with $18.7 billion in revenue last year and no profits. For those keeping score at home, that is 94 times 2025 revenues. Of course nobody is buying the stock for fundamentals at this point – this will be a pure momentum play. If the crowd loves it, then professional money managers will have to own it fundamentals be damned. The prospectus is here.

Once they go public, the new moniker for the erstwhile acronym for the market darlings (FAANG) will be replaced by MANGOS, which represents the stocks Meta, Anthropic, Nvidia, Google, OpenAI and SpaceX.

Homebuilder Lennar announced earnings per share of $1.24 versus $1.81 a year ago. Revenues from homebuilding fell 2% YOY, driven by a 5% decrease in average selling prices and a 2% increase in deliveries. The ASP of $317,000 reflects a whopping 12.9% in incentives. Typical incentives are around 4% – 6%, which gives you an idea of how much the company is giving away to move the merchandise. Gross margins fell to 15.6%, driven by higher land costs and lower revenues per square foot.

CEO Stuart Miller said: “Our second quarter of fiscal year 2026 was defined by the same stubborn headwinds that have challenged the housing market for the past several years – persistently elevated mortgage rates, constrained affordability, and cautious consumer sentiment, exacerbated by geopolitical uncertainty creating a resurgent inflation reading of 4.2% driven by higher energy prices.”

Part of the homebuilding industry’s woes are being driven by higher input costs (i.e. sticks and bricks). In yesterday’s PPI report, inputs for residential construction rose 1.3% in May and 6.9% on a YOY basis. This is being driven primarily by higher energy costs, not tariffs. Actual building materials rose 0.4% MOM and 4.4% compared to a year ago. The NAHB produced this chart:

Rate lock volumes declined about 2% in May, according to MCT. Purchase volume remained steady, while refi activity decreased. “The industry should just continue to bunker down and shield themselves, staying disciplined with lock policies and procedures,” said Andrew Rhodes, Head of Trading at MCT. “A lot of volatility is still ahead of us.”

On Monday, Eris Futures will start trading SOFR options. This is a great way to hedge some of the convexity risk in your NQM portfolio and MSRs.

Stocks are higher as fighting continues in Iran. Bonds and MBS are up small.

Ugly PPI report. Wholesale prices rose 1.1% in May, according to BLS. Nearly 80% of the increase was due to goods. Services rose 0.3%. Gasoline accounted for half the increase in goods. If you strip out food and energy, the numbers are still hideous. We had a 0.4% increase for the month, which works out to be 4.9% annually.

Bonds seem to be taking the number in stride, but this was a big miss.

Treasury did a 10 year auction yesterday. The yield came in at 4.538% with a bid / cover of 2.57. The bid / cover ratio of 2.57 indicates decent demand. International buyers were the aggressive ones.

Home equity withdrawals (i.e. seconds and cash-0ut refis) are increasing, according to the ICE Mortgage Monitor. With credit card debt at record highs, many borrowers are finding it makes sense to roll all of that 20% interest rate debt into a lower rate mortgage. Second-lien withdrawals hit an 18 year high, while cash-outs were the highest since 2021.

“The housing market continues to be defined by the lock-in effect,” said Andy Walden, Head of Mortgage and Housing Market Research at ICE. “Millions of homeowners are sitting on first mortgages with rates well below current market levels, making second liens and HELOCs an attractive way to access equity without giving up those loans. While higher mortgage rates have reduced refinance opportunities and softened affordability gains in recent months, home prices continue to firm across much of the country and affordability remains improved from year-ago levels.”

“As refinance opportunities become more limited, home equity products are playing a larger role in helping homeowners access liquidity and meet financial goals,” said Bob Hart, President of ICE Mortgage Technology. “Lenders that can effectively identify, engage and serve those borrowers across both mortgage and home equity channels will be best positioned to capitalize on evolving consumer demand.”

Loan officers who are not asking their existing borrowers about their other credit card debt are leaving money on the table. These products can save borrowers a lot of money.

US regulatory costs related to homebuilding increased 40% from 2021 to 2026, according to the NAHB. The study estimates that 26.4% of the cost of a new home (or over $131k) is caused by regulatory compliance.

It appears most of these costs are driven by state and local governments, so there is not good lever for the Federal government to use. This will be a fight more by NIMBYs and YIMBYs.

M&A in the resi space continues, as Figure, a blockchain finance company is acquiring Kiavi. “Figure is relentless in our pursuit of moving the capital markets onto blockchain rails, and nine months past our successful IPO, this Kiavi transaction is a further pole vault into tokenization, first-lien diversification and our agentic AI platform,” said Michael Tannenbaum, Figure CEO. “Adding Kiavi’s RTL and DSCR capabilities into our partner network will symbiotically supercharge their growth and the growth of our consumer loan marketplace.”

“For the past 13 years, Kiavi has been focused on powering our data flywheel and proving what’s possible when technology and industry expertise converge,” said Arvind Mohan, CEO of Kiavi. “This transaction represents a massive leap forward for the asset class. With Kiavi’s industry-leading platform powered by Figure’s innovative blockchain marketplace, we have the opportunity to deliver an entirely new – and unmatched – standard of reach, reliability, and execution.” Following the deal close, Mohan will join Figure’s executive team as Chief Business Officer.

Stocks are lower this morning as tech continues to get beaten up. Bonds and MBS are flat.

The consumer price index rose 0.5% MOM and 4.2% YOY in May, according to BLS. Energy and shelter drove the increase. These numbers were in line with street expectations. If you strip out food and energy, prices rose 0.2% MOM and 2.9% YOY. These were a touch below expectations.

Energy prices are up 23% YOY. Food was up 3.1% and shelter 3.4%.

Existing home sales rose 3.2% in May, according to NAR. Unsold inventory stood at 1.55 million units, which represents a 4.5 month supply. This is still on the small side, however it is an improvement from the 3.5 month we were seeing a year or two ago. The median home price rose 1.2% YOY to $429,300. The housing affordability index rose as well as affordability improved across all regions.

“More Americans are on the move, with home sales rising to the highest level since December. This is great news for the housing market and the economy,” said NAR Chief Economist Dr. Lawrence Yun. “Improving affordability is helping drive this momentum. Even with mortgage rates ticking up compared to earlier in the year, they remain lower than a year ago and are essentially at the long-term historical average. Income gains are also outpacing home price growth by a small margin in most parts of the country.”

“The new record-high May home price reflects solid fundamentals for homeowners and ongoing supply constraints,” Yun said. “Only 1% of all home sales involved a foreclosure or an underwater situation in which the sale price could not cover the outstanding mortgage balance. This shows that homeowners are on solid financial footing.”

As time goes on, the rate lock in effect becomes smaller. On one hand, more and more mortgages have 6.5% rates and not 3.5% rates. This reduces the incentive to stay put for rate reasons. Second, as the era of 0% interest rates fades into history, recency bias takes over and people now think a mortgage rate of 6.5% is normal and 3.5% mortgage rates aren’t coming back. People are less likely to want to wait it out for lower rates to move.

Mortgage applications rose 10.8% last week as purchases increased 7% and refis rose 15%. There was an adjustment for the Memorial Day holiday which might be introducing some noise into the numbers.

“Mortgage rates were volatile last week as news from the Middle East continues to drive markets,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “While the average rate was up slightly, with the 30-year fixed rate now at 6.6%, there were opportunities where borrowers were seeing somewhatlower rates. Both refinance and purchase applications rebounded coming out of the Memorial Day holiday week, with refinance applications up 15% and purchase applications up 7%.”

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

Small business optimism declined in May, according to the NFIB. The uncertainty index increased 3 points and is well above its historical average. Sales improved, however the outlook remains pessimistic. The employment index was flat although 31% reported increasing compensation. Hiring plans declined to a 6 year low.

Inflation continues to be an issue, with a net 36% of all owners reporting that they increased average selling prices. This is the highest reading since March 2023.

Part of the economy is on a sugar rush – almost all related to AI investment spending and it’s flying high. The stock market is posting new highs, but again, mostly due to that one soaring sector. Meanwhile, gas prices have spiked reflecting a reduction in the global oil supply, but also the risk premium that war has produced. Oil is a cost component in just about everything, so its rising price shows up in just about everything. A net 36% (seasonally adjusted) of the owners reported raising their selling prices, well above the historical average of net 13%. This leads right into CPI inflation, which is too strong to give the Fed license to reduce rates. It may even consider raising its policy rate.

The employment picture looks increasingly gloomy, as job openings continue to decline. Openings fell to 2020 levels as did hiring plan —
recession numbers without a recession. Sales prospects are not strong, but not falling apart. Perhaps the economy is becoming bifurcated, one piece driven by AI spending, rising asset prices (e.g. stocks) and spending by higher income consumers benefiting from AI, while the other piece suffers from rising costs.

Uncertainty is the enemy of growth and investment, and it is high. Much is related to the Iran War and its impact on the global oil supply and other commodities, the sooner it’s resolved, the quicker some “normality” will be restored.

Real estate price appreciation improved in May, according to the Clear Capital Home Data Index. Nationally, home prices rose 1.3% on a quarterly basis and 1.9% annually after rising 0.6% quarterly in April. Every region rose on a quarterly basis, and only one was negative on an annual basis.

The hip-to-be-square trade continues, with Rochester NY taking the top spot for home price appreciation followed by Milwaukee. Other MSAs in the top 15 include Providence, Birmingham, St. Louis and Pittsburgh. On the losing side, it still remains dominated by the darlings of COVID with a lot of Sun Belt MSAs. Florida is well-represented as Jacksonville, Orlando and Tampa all registered in the bottom 15.

In the blog commentary, I discuss delinquencies and which parts of the market are struggling the most.

OpenAI the parent company of Chat GPT filed confidentially for an IPO. Since it is a confidential filing, the actual finances of the company will remain undisclosed until closer to the filing. “We recently submitted a confidential S-1. We expect it to leak so we’re just announcing it. We have not decided on timing yet; it may be a while because there are things we want to do that are likely easier as a private company. But it’s a complicated set of tradeoffs and this gives us the option to go public sooner if that ends up being best.”

The company is expected to have a market cap of $1 trillion. Its current private market value is $852 billion.

OpenAi, Anthropic and SpaceX all plan what will be massive IPOs coming up. This will be an interesting test for the stock market. If these companies follow the normal pattern, they will sell a tiny portion of the stock to the public, hoping that demand for a limited number of shares will goose the value.

Stocks are rebounding after Friday’s bloodbath in tech. Bonds and MBS are down.

Israel and Iran exchanged fire over the weekend. Trump told both sides to knock it off and now Iran is saying it has ended its waves of strikes. This has to be the most hostile cease fire I have ever seen.

The week ahead will be dominated by inflation data, with the consumer price index on Wednesday and the Producer Price Index on Thursday. Aside from the inflation data we will get existing home sales and consumer sentiment. Treasury will do a 10 year auction on Wednesday.

We are also in the quiet period ahead of the June FOMC meeting so we won’t have any Fed speakers. Lennar will announce earnings on Thursday.

The jobs report on Friday prompted the Fed Funds futures to re-calibrate the chances for rate hikes this year. The June futures still overwhelmingly see no change, but the December futures see an over 70% chance of a rate hike this year.

The June meeting will give us a fresh set of economic projections and a new dot plot

Cleveland Fed President Beth Hammack had this to say on Friday after the jobs report:

The Federal Reserve’s inflation objective is 2 percent.

That number isn’t just theoretical; price stability is a foundation for businesses, consumers, and investors to make sound economic decisions. It’s key to economic growth and maximum employment in the longer run.

While I never make too much of any one data point, today’s jobs report reaffirms that the labor market appears to be roughly in balance. The unemployment rate remaining stable at 4.3 percent is right around my definition of full employment.

By contrast, inflation is telling a different story. It’s high, moving higher, and I believe persistently high inflation is the bigger concern.

When I’m out in the District, I’m starting to hear from people that they don’t think things are going to get better any time soon. It would be a bad development if consumers, businesses, and financial markets begin to expect higher inflation in the future. Such a shift in expectations would warrant decisive action.

For today, it’s reasonable to keep rates steady given the uncertainties around the economic outlook. But if recent trends continue, it may soon be appropriate to act.

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

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

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

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

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

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

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

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

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