Stocks are higher this morning as markets calm down over the tariffs. Bonds and MBS are down.
The mystery remains as to Trump’s intentions: Are these tariffs a negotiating ploy to get other countries to reduce their tariffs or does Trump envision these as a permanent fixture of the US economy. If you ask Chat GPT, it will tell you that Trump is ideologically committed to them, but Chat GPT is collecting its data from the press, which is speculating. No one really knows what Trump is thinking here.
On the other hand, Trump appears to view the US’s Naval enforcement of shipping lanes as something that should be paid for by our trading partners. I am not sure how imposing costs on US consumers accomplishes that.
As markets and polls fall, Congress will lose patience with tariffs and pass legislation that sunsets these tariffs unless extended by Congress. All Democrats will be onboard and it won’t take many Republicans to get it through. The ability for the President to pass tariffs on national security issues was always dubious at best and tariff / trade policy should be controlled by Congress, not unilaterally by the Executive Branch.
Bottom line: I don’t think this lasts through the summer, but that is just my opinion (hope).
Small Business optimism fell in March, according to the NFIB. Inflation fell from the the top of the list of concerns, while labor quality remained the biggest problem. Uncertainty is climbing.
“This year will be one ruled by uncertainty. Global and domestic actions are generating insecurities in abundance, both political and economic. President Trump’s administration is rearranging the deck chairs at a record pace. Is there an “iceberg” looming ahead or will we sail through to a restructured economy safely? Since 1986, NFIB’s Uncertainty Index (based on the percent of respondents reporting “uncertain” or “don’t know” to six questions) has averaged 68. But, since 2016 it has averaged 80 and reached its highest level of 110 in October 2024.”
The tariffs will continue to have a corrosive impact on confidence the longer they go on.
Stocks are lower as investors continue to fret over tariffs. Bonds and MBS are up, and the 10 year traded at 3.9% in the overnight session.
The week ahead will be dominated by the continued market reaction to tariffs. In terms of economic data, we have the Consumer Price Index and the Producer Price Index and Consumer sentiment along with a slate of Fed speakers. Finally earnings season kicks off on Friday with many of the big banks reporting.
With the decline in the stock market, we are starting to see some movement in the Fed Funds futures as the May futures now have around a 50/50 chance of a rate cut. The December Fed Funds futures now see 4 as the most likely case and 5 as the next most likely case. The Fed Funds futures may be simply following the stock market, of course. We know the Fed considers the neutral rate (i.e. r-star) to be around 3.25% or so. This means they need to cut rates about 100 basis points in order to get to neutral, and if the economy heads into a recession they will need to cut more. So start thinking about the possibility of a 3% Fed Funds rate and sub-6% mortgage rates.
The economy added 228,000 jobs in March, according to the Employment Situation report. This number was well above Street expectations of 131,000. The unemployment rate was flat MOM at 4.2%. Average hourly earnings rose 0.3% MOM and 3.8% YOY, which was again below expectations. Despite all of the sturm and drang in the market about tariffs, this jobs report was pretty decent.
Jerome Powell said that the economy would likely experience higher inflation and slower growth than was anticipated several months ago due to tariffs. “We’re well positioned to address whatever may come. And in the meantime, I’d say we’re waiting for greater clarity before we consider adjustments,” Powell said at a conference for business journalists.
“Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” Powell said in prepared remarks. “We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy.”
“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Powell said. “Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices.”
The impact of the tariffs on inflation will be determined primarily by how our trading partners react. China has already imposed retaliatory tariffs, however a third of our exports to China are commodities, which are falling in response to a trade war. If China isn’t buying US commodities, that increases supply in the US and pushes down prices. We are already seeing weakness in oil, steel and some ag futures. If commodity prices fall, then that will go a long way towards offsetting inflationary trends in final goods.
With the stock market collapsing, the pressure will mount on the Fed to cut rates, even before the May FOMC meeting.
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Stocks are lower as markets continue to react to tariffs. Bonds and MBS have had a furious rally since the announcement, with the 10 year trading with a 3 handle.
As a general rule mortgage rates will lag big moves in the 10 year, so if rates find a level here, we probably will see more downward pressure on mortgage rates. For all of the consternation in the press and chattering classes about the inflationary impact of tariffs, bonds are not confirming that opinion.
Announced job cuts surged in March, according to the Challenger and Gray Job Cut Report. Companies announced 172k job cuts which was the highest monthly total since July 2020. “Private companies announced plans to shed thousands of jobs last month, particularly in Retail and Technology. With the impact of the Department of Government Efficiency [DOGE] actions, as well as canceled Government contracts, fear of trade wars, and bankruptcies, job cuts soared in February,“ said Andrew Challenger, Senior Vice President and workplace expert for Challenger, Gray & Christmas.
Government led the charge in job cuts with 62k. There are another 200k on hold due to some judge but he will probably get overturned, so there are definitely more cuts in the hopper. Not only will government jobs get cut, the Beltway Bandit Consultancy Service will also take some hits.
The services economy expanded in March, according to the ISM Services Report. “March saw drops in the readings of three (New Orders, Employment and Supplier Deliveries) of the four subindexes that directly factor into the Services PMI®. Only Business Activity saw an increase over February’s reading. Employment was the only one of these subindexes to drop into contraction territory after three straight months with all four in expansion. There has been a significant increase this month in the number of respondents reporting cost increases due to tariff activity. Despite an increase in comments on tariff impacts and continuing concerns over potential tariffs and declining governmental spending, there was a close balance in near-term sentiment, between panelists with good outlooks and those seeing or expecting declines.”
Prices declined, which is good news for falling inflation.
Donald Trump has imposed 10% tariffs across the board and further tariffs on China and Japan which are labeled bad actors, which has sent stocks down. I do think that 10% was lower than feared. Interestingly, the bond market is rallying – if inflation was the fear, we wouldn’t see the 10 year pushing towards 4%. I am thinking that there is some noise in the bond market between the reduction of QT and the flight to safety trade. Note that the Fed Funds futures haven’t moved much, and are still forecasting 3 rate cuts this year. That said, the futures are inching towards an expectation of 4 rate cuts this year.
There isn’t much action in terms of the slope of the yield curve – the 2s / 10s spread is sort of in a 20-40 bp positive spread for the past few months. Ditto for the F/X markets, where the euro and the Japanese yen are slightly stronger than was when Trump won. The US dollar index (DXY) is down about 2% over the past few days, but nothing dramatic.
Earnings season starts in a couple of weeks, so it will be interesting to see how Corporate America expects to be impacted.
I think there are three potential scenarios here. The first is that our trading partners remove their tariffs on US products, the US removes their reciprocal tariffs and life goes on. This would be the ideal scenario and an absolute win.
The second is that these countries make some sort of token concession that lets Trump declare victory, and then Trump removes the reciprocal tariffs. This is sort of a return to the status quo.
Finally we get into a protracted trade war with our overseas partners, which the US will win, because the US economy is more able to take the pain than overseas partners. This is obviously the worst case scenario.
Trump sees the US as holding the upper hand in these negotiations. He is probably correct in that assessment. Trump is a businessman and has the instinct to use that power to drive a better deal. Trump wants a deal, not a trade war, so I suspect we will see a combination of #1 and #2. Finally, I think Trump isn’t going to stick to a scenario that isn’t working. CEOs generally lose patience with a underperforming strategy quicker than politicians or bureaucrats.
This could mean that globalization will be in retreat for a while. Trump rode a wave of populist rejection of globalization, and it may well turn out that the high water mark for globalism, international climate treaties has been seen.
Where does this leave the Fed? It will make them content to wait until we have clarity on the economic effects of this trade war. Note that Jerome Powell speaks this Friday, so we will see if the Fed has any additional thoughts. If the economy goes south, Trump will pressure Powell to cut rates, but the Fed will need to do that anyway to get closer to r-star.
The private sector added 155,000 jobs in March, which was above expectations of 120,000 and also above the private payroll expectation in Friday’s jobs report. “Despite policy uncertainty and downbeat consumers, the bottom line is this: The March topline number was a good one for the economy and employers of all sizes, if not necessarily all sectors,” said Nela Richardson, chief economist, ADP. Professional and business services saw the highest growth, with financial services right behind it. Annual pay increased 4.6%, continuing its downtrend.
Mortgage applications fell 1.6% last week as purchases rose 2% and refis fell 6%. “Treasury yields continue to be volatile as economic uncertainty dominates markets. Most mortgage rates finished last week lower, with the 30-year fixed essentially unchanged at 6.70 percent. Last week’s level of purchase applications was its highest since the end of January, driven by a 3 percent increase in conventional purchases, while government purchase applications were down 2 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall purchase activity has shown year-over-year growth for more than two months as the inventory of existing homes for sale continues to increase, a positive development for the housing market despite the uncertain near-term outlook. Refinance applications were down almost 6 percent last week and remain very sensitive to rate movements, as most borrowers have mortgages with lower rates.”
Tools for Mortgage Originators
Are you a mortgage originator with a bookkeeper, but no financial analyst? Are you doing without an annual budget because you don’t have the time / resources to develop one? Are you considering an acquisition, and want an in-depth analysis of the potential synergies and impact on the bottom line? Perhaps you have some projects that need to be done, but you can’t justify a full-time hire.
I am a consultant who has extensive experience in capital markets, secondary marketing, FP&A, budgeting, and servicing. If you think you might have a need, let’s set up a discovery call.
The manufacturing sector returned to contraction in March, according to the ISM Manufacturing Survey. “In March, U.S. manufacturing activity slipped into contraction after expanding only marginally in February. The expansion in both February and January followed 26 consecutive months of contraction. Demand and output weakened while input strengthened further, a negative for economic growth. Indications that demand weakened include: the (1) New Orders Index falling further into contraction territory, (2) New Export Orders Index dropping into contraction, (3) Backlog of Orders Index contracting at a faster rate, and (4) Customers’ Inventories Index remaining in ‘too low’ territory.
“Demand and production retreated and destaffing continued, as panelists’ companies responded to demand confusion. Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery slowdowns and manufacturing inventory growth. Forty-six percent of manufacturing gross domestic product (GDP) contracted in March, up from 24 percent in February. “
Needless to say, tariff uncertainty is causing manufacturers to be more cautious.
Job openings fell to 7.6 million in February, according to the JOLTs job openings report. Openings fell across the board on a YOY basis, although we did see construction openings increase. The quits rate was flat at 2.0%.
Construction job openings are at a 3 year low as homebuilders battle affordability issues. While tariffs aren’t necessarily helping, the driver of affordability has been the rapid rise of real estate prices driven by expansionary fiscal and monetary policy during the COVID era and higher mortgage rates. The layoff rate in construction remained extremely low at 1.8%.
New York and San Francisco are seeing increased demand for real estate, according to research from Redfin. 57% of homes in San Francisco sold over asking, and Nassau County saw a similar percentage. “The Bay Area has an unending population of people with enormous swaths of money,” said Josh Felder, a Redfin Premier real estate agent in the Bay Area. “A decade or so ago, we all thought the growth in home prices was unsustainable, but they just keep going up and up. That’s partly because there aren’t enough homes for sale, and partly because tech continues to boom despite ups and downs in the stock market and geopolitical uncertainty.”
Southern California (particularly San Diego) is seeing more homes sell below listing.
Rocket has agreed to buy Mr. Cooper in a $9.4 billion stock deal. This deal is about recapturing the refi on Mr. Cooper’s servicing portfolio. “Servicing is a critical pillar of homeownership – alongside home search and mortgage origination,” said Varun Krishna, Rocket CEO. “With the right data and AI infrastructure we will deliver the right products at the right time. That’s how we build lifelong relationships, by proactively unlocking benefits and meeting needs before they arise. We look forward to welcoming Mr. Cooper’s nearly 7 million clients.”
Rocket claims it has an 83% recapture rate, which is 3x the industry average. On the investor conference call, Rocket was asked about what they were planning on doing with Mr. Cooper’s correspondent channel and they said they were keeping it. The combined companies expect to see around $500MM in synergies, of which $400 are cost synergies and $100MM are revenue synergies. Since UWM sold a lot of servicing to Mr. Cooper, that is probably the revenue synergies they imagine they will see.
They claimed on the call that the believe the regulators, GSEs and Ginnie Mae will look favorably on the transaction. The deal is expected to close in Q4, so they are signaling the regulatory path might be somewhat difficult. Between the Redfin and Mr. Cooper deals, Rocket is looking to touch every part of the value chain in a real estate transaction. How will UWM respond?
The Chicago PMI improved in March, rising to 47.6. This is the third consecutive monthly gain, and is the highest level since November of 2023. That said, the index remains in contractionary territory. Production, employment, and new orders advanced.
Are you a mortgage originator with a bookkeeper, but no financial analyst? Are you doing without an annual budget because you don’t have the time / resources to develop one? Are you considering an acquisition, and want an in-depth analysis of the potential synergies and impact on the bottom line? Perhaps you have some projects that need to be done, but you can’t justify a full-time hire.
I am a consultant who has extensive experience in capital markets, secondary marketing, FP&A, budgeting, and servicing. If you think you might have a need, let’s set up a discovery call.
Stocks fell pretty dramatically on Friday on fears of new tariffs. Bonds rallied, presumably on the flight-to-safety trade. The 10 year bond yield fell 12 basis points to 4.24%. The business press has been citing inflation fears, which doesn’t make a lot of sense. The other explanation is end-of-quarter noise.
The week ahead will be dominated by the jobs report on Friday. We will also get ISM data. So far we haven’t seen the DOGE effects show up in the labor numbers, so this will probably be the first month it shows up.
Consumer sentiment fell in March, according to the University of Michigan Consumer Sentiment Survey. Consumers were more fearful about the job market, with two thirds expecting unemployment to rise. This is the highest reading since 2009.
Republicans joined independents and Democrats in their expectation that things will get worse. That said, the views of the economy are quite divergent, with Republicans a lot more sanguine than Democrats. So, if the survey is over-sampling one party versus another, it might skew the results.
Inflationary expectations also increased from 4.3% to 5.0%. I guess the news about tariffs is causing that, since PCE inflation peaked about 3 years ago and hasn’t been above 3% since 2023.
The Atlanta Fed GDP Now model sees -2.8% growth in Q1. This is a decline from the previous reading of -1.8%. The Fed Funds futures see a 80% chance of a rate cut in June and another 2 this year. If the Atlanta Fed model is remotely close, and the sentiment about employment is accurate, the Fed will need to get to r-star quickly and that means more than 3 cuts this year.
Stocks are flattish as we await the PCE inflation data. Bonds and MBS are up small.
Personal incomes rose 0.8% MOM in February, according to the BEA. This was well above the 0.4% expectation. Personal spending was flat however, versus an expected 0.5% increase. The PCE Price Index rose 0.3% MOM and 2.5% YOY, which was in line with expectations. The core rate was a little hot, rising 0.4% MOM and 2.8% YOY, both 10 bp above expectations.
January personal income growth was revised downward.
Pending home sales rose 2.4% in February, according to NAR. “Despite the modest monthly increase, contract signings remain well below normal historical levels,” said NAR Chief Economist Lawrence Yun. “A meaningful decline in mortgage rates would help both demand and supply – demand by boosting affordability, and supply by lessening the power of the mortgage rate lock-in effect.”
NAR also introduced new forecasts: the 30 year fixed rate mortgage is expected to average 6.4% this year, while home prices are expected to rise 3%. New home sales are expected to rise 10%, while existing home sales will rise by 6%.
“Considering the Federal Reserve’s recent forecast for slower economic growth, we expect mortgage rates to slide moderately lower,” said Yun. “But the current high national debt will prevent mortgage rates from falling drastically – and certainly not to the 4%-to-5% range seen during President Trump’s first term.”
In other economic news, fourth quarter GDP came in at 2.4%, while consumption was revised down from 4.2% to 4%. Initial Jobless Claims dropped 1K to 224K.
The median monthly housing payment rose 5.3% YOY to $2,807, according to research from Redfin. Higher home prices and lower mortgage rates have somewhat offset each other. That said, we are starting to see more activity, with listings up 7.5% compared to a year ago.
“Buyers are cautious because they’re worried about the economy and potential layoffs, and they’re wondering if mortgage rates will come down later this year. But because other buyers are cautious too, some house hunters are getting homes for under asking price,” said Kimberly Freutel, a Redfin Premier agent in Sammamish, WA. “If you love a home and you see yourself living there for at least four or five years, make an offer you’re comfortable with, even if it’s a little below list. Don’t assume it will escalate out of your price range, because the seller might actually take it. I’m asking my clients, ‘Would you be sad if this home ends up selling for less than asking price to someone else?’”
Are you a mortgage originator with a bookkeeper, but no financial analyst? Are you doing without an annual budget because you don’t have the time / resources to develop one? Are you considering an acquisition, and want an in-depth analysis of the potential synergies and impact on the bottom line? Perhaps you have some projects that need to be done, but you can’t justify a full-time hire.
I am a consultant who has extensive experience in capital markets, secondary marketing, FP&A, budgeting, and servicing. If you think you might have a need, let’s set up a discovery call.
Stocks are down on news that Trump intends to slap a 25% tariff on imported vehicles. Bonds and MBS are down.
Mortgage applications fell 2% last week as purchases fell 1% and refis fell 5%. “Purchase applications saw the strongest weekly pace in almost two months and were 7 percent higher than a year ago. Last week’s purchase activity was driven primarily by a 6 percent increase in FHA applications, as the combination of loosening housing inventory and slowly declining mortgage rates have presented this segment of buyers with more opportunities,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Additionally, VA purchase applications saw a modest increase over the week. Overall applications declined, however, as refinance applications were down 5 percent to its lowest level in a month.”
Added Kan, “Markets remained focused on potential trade policy changes, while the Fed held the funds rate its current level, resulting in the 30-year fixed rate averaging 6.71 percent last week.”
Durable goods orders rose 0.9% in February, which was well above Street expectations. Durable goods orders ex-transportation rose 0.7%, again above expectations. The upside surprise was primarily attributed to aircraft orders. The strength in orders is being attributed to a rebound after a few weak months. Business might be front-loading some orders ahead of tariffs. That said, shipments remain strong so business is doing reasonably well.
It does pour some cold water on the narrative that Trump is causing enough uncertainty that business is sitting on its hands. I am not sure how much of this is astroturfed media wishcasting and how much is real. Q1 earnings will tell the story, especially what is said on earnings conference calls.
The latest Atlanta Fed GDP Now model still sees -1.8% growth in Q1 however.
Consumer confidence fell in February as expectations for the future slid to a 12-year low. The expectations index fell below the threshold that typically signals a recession.
“Consumer confidence declined for a fourth consecutive month in March, falling below the relatively narrow range that had prevailed since 2022,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “Of the Index’s five components, only consumers’ assessment of present labor market conditions improved, albeit slightly. Views of current business conditions weakened to close to neutral. Consumers’ expectations were especially gloomy, with pessimism about future business conditions deepening and confidence about future employment prospects falling to a 12-year low. Meanwhile, consumers’ optimism about future income—which had held up quite strongly in the past few months—largely vanished, suggesting worries about the economy and labor market have started to spread into consumers’ assessments of their personal situations.”
The decline in the stock market hasn’t helped things either. The overall message is that tariffs are stoking fears of future inflation and consumers are worrying that will tank the labor market. The vibecession continues.
New Home Sales rose 1.8% MOM and 5.1% YOY to a seasonally adjusted annual rate of 676,000. The number was more or less in line with expectations. The median sale price fell 1.5% to $414,500. This comports with KB’s results which showed that all the action was in the lower price points. We still have yet to see any meaningful life in new home sales despite the drop in rates.
The S&P Case-Shiller Home Price Index rose 4.1% in January to hit a new all-time high. New York led the charge again, followed by Chicago and Boston. Tampa slid again.
“Rising mortgage rates throughout the year elevated monthly payment burdens, which, combined with already high home prices, pushed affordability to multi-decade lows in many regions. This likely contributed to subdued activity in the back half of the year, with both buyers and sellers exercising caution. Inventory constraints also remain a challenge, particularly in legacy metro areas, where limited new construction continues to restrict supply.
“The strength in markets like New York and Chicago may reflect more normalized valuations relative to frothier regions, along with continued urban recovery trends post-pandemic. On the other hand, Sunbelt markets that experienced sharp run-ups earlier in the cycle—like Tampa and Phoenix—have seen the most pronounced slowdowns.
“Despite near-term softness, the S&P CoreLogic Case-Shiller Index remains historically elevated, and long-term homeowners have continued to build equity,” Godec concluded. “The current cycle reinforces the value of real estate as a long-duration asset, but also highlights how sensitive home prices are to changes in financing conditions and buyer affordability.”
Separately, the FHFA House Price Index rose 0.2% MOM and 4.8% YOY.
The FHFA will not cut the conforming loan limits, the agency said. “There are no plans to do anything as it relates to the conforming loan limit,” Pulte said Tuesday. Conservative think tanks have been pushing the idea that Fan and Fred should not be guaranteeing million dollar properties when there is clearly a demand for these loans in the private label market.
That said, the GSEs make the biggest margins on the high-end mortgages and these profits subsidize the less profitable products like Home Ready. So reducing these loans could cause the first time homebuyer loans to become more expensive.
Are you a mortgage originator with a bookkeeper, but no financial analyst? Are you doing without an annual budget because you don’t have the time / resources to develop one? Are you considering an acquisition, and want an in-depth analysis of the potential synergies and impact on the bottom line? Perhaps you have some projects that need to be done, but you can’t justify a full-time hire.
I am a consultant who has extensive experience in capital markets, secondary marketing, FP&A, budgeting, and servicing. If you think you might have a need, let’s set up a discovery call.
