The Daily Tearsheet

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.”