The Daily Tearsheet

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.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Wall Street Journal discovers the DSCR loan.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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