The Daily Tearsheet

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

______________________________________

Is your balance sheet carrying loans that won’t sell? Western Alliance Bank’s Correspondent Mortgage Solutions team operates a dedicated scratch-and-dent trading desk, actively bidding on all tape sizes, from single loans to large pools.

Whether performing or non-performing, newly originated or seasoned, the experienced Western Alliance team buys across the credit spectrum, accepts eNotes and prides itself on meeting month- and quarter-end closing settlements. As an added benefit for existing mortgage warehouse lending clients, Western Alliance offers the ability to coordinate an advance at the expected purchase price upon trade commitment.

“Our scratch-and-dent desk offers clients deep market expertise backed by a genuine commitment to finding solutions across the credit spectrum,” says Rob Smialek, Residential Mortgage Trader, Western Alliance Bank. “We bring the experience, flexibility and market access to move quickly on any tape, because we know that for our clients, solving today’s challenges creates the foundation for tomorrow’s success.”

That commitment to customer service is a big part of why Western Alliance Bank, Member FDIC, ranks among the Top 15 U.S. Banks by Reputation in 2025, as rated by customers, according to American Banker. Customers agree: David Smith, Chief Financial Officer, Momentum Loans, says, “The customer service at Western Alliance Bank is unparalleled. Everyone is quick to respond, extremely professional and always kind and courteous. They are an outstanding business partner who understands our company, have supported us during both positive and challenging markets, and have consistently helped us grow our business.”

Please send scratch-and-dent bid requests to SnD@westernalliancebank.com. Other tailored solutions include MSR financing, note financing, customized cash management tools and corporate credit cards. You also benefit from synchronicities between Western Alliance and Western Alliance subsidiary AmeriHome, the nation’s largest bank-owned correspondent lender.* To learn more and experience Western Alliance Bank’s elevated, personalized client service, contact the Western Alliance team. *According to Inside Mortgage Finance, 5/1/2026.

________________________________________

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.