The Daily Tearsheet

Morning Report: The jobs report isn’t as bad as feared

Vital Statistics:

Stocks are flat after a weaker-than-expected jobs report. Bonds and MBS are up.

Jerome Powell will be speaking at the University of Chicago at 12:30 today, just before the Fed enters its quiet period ahead of the March FOMC meeting.

The economy added 151,000 jobs in February, which was a touch below the Street expectation of 160,000. The unemployment rate ticked up to 4.1%, which was above street expectations of 4.0%. Private payrolls rose 140k, while the increase in average hourly earnings rose 0.3% versus 0.5%.

The labor force participation rate declined to 62.4% and the employment-population ratio fell to 59.9%. We saw job gains in health care / social assistance, construction, and finance, while payrolls fell in retail and leisure / hospitality. Government payrolls increased, surprisingly.

Overall, the jobs report was not as bad as feared (the “whisper number” on payrolls was 120k), and it shows the economy is not falling off a cliff. I suspect we will see the DOGE layoffs reflected in the next report.

The bond market initially sold off on the report, but yields worked their way lower as the markets digested the data. The report wasn’t bad enough to bring the March meeting into play for a rate cut, but a cut by June is a 90% probability. The December futures see 3 rate cuts this year as the most likely scenario, with 4 being the next most likely.

The March dot plot will be interesting, particularly around the long-term Fed Funds rate, which will give us an idea of how far the Fed needs to go in order to get to neutrality.

Mortgage delinquency rates fell in February, according to the ICE Mortgage Monitor. Foreclosure starts increased as the VA moratorium expired. The average homeowners insurance premium rose by 14%, or $276 which was the biggest increase since 2013.

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Morning Report: Job cuts soar

Vital Statistics:

Stocks are lower as markets digest some shock waves in the bond market. Bonds and MBS are flat.

US Treasuries reversed their push towards lower rates yesterday after Germany decided to increase defense spending without raising taxes or cutting other spending. The German Bund yield tacked on 30 basis points in yield (a gargantuan move for a sovereign bond) while pulled rates higher across the board.

We await the decision from the European Central Bank this morning, where they are expected to cut by 25 basis points. Since global sovereign bonds generally correlate, the US Treasury was impacted by this move as well.

Home prices fell 0.2% on a quarterly basis and rose 4.7% on an annual basis, according to the Clear Capital Home Data Index. For the most part, prices are still increasing on an annual basis, although MSAs like Tampa did see a slight decline.

The services economy expanded in February, according to the ISM Services Report. Despite all the fears about the economy weakening, both the ISM Manufacturing Report and the ISM Services report remained in expansion territory.

Prices did increase, and uncertainty is weighing on the sector, especially when it comes to tariffs. “February was the third month in a row with all four subindexes that directly factor into the Services PMI^® — Business Activity, New Orders, Employment and Supplier Deliveries — in expansion territory, the first time this has happened since May 2022. Slightly slower growth in the Business Activity Index was more than offset by growth in the other three subindexes. Anxiety continues; however, over the potential impact of tariffs. Some respondents indicated that federal spending cuts are having negative impacts on their business forecasts.”

Announced job cuts soared last month to 172,017 which was the highest monthly total since 2009. “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, with 62,242, followed by retail at 38,956. DOGE impact was cited as the biggest reason for the cuts.

Morning Report: Job growth disappoints

Vital Statistics:

Stocks are flattish this morning after the ADP jobs report came in light. Bonds and MBS are down small.

The private sector added 77,000 jobs in February, according to the ADP Employment Report. The consensus was for 162,000 jobs, so this is a sizeable miss. “Policy uncertainty and a slowdown in consumer spending might have led to layoffs or a slowdown in hiring last month,” said Nela Richardson, chief economist, ADP. “Our data, combined with other recent indicators, suggests a hiring hesitancy among employers as they assess the economic climate ahead.”

Pay increased 4.7% for job stayers. ADP looks at private payrolls, not total, so it would correspond to the 143,000 expectation for Friday’s jobs report. Friday’s jobs report could miss substantially on the back of DOGE and government workers / contractors being let go.

Mortgage applications rose 20% last week as purchases rose 9% and refis increased 37%. The 30 year fixed rate mortgage declined from 6.88% to 6.73%.

“Mortgage rates declined last week on souring consumer sentiment regarding the economy and increasing uncertainty over the impact of new tariffs levied on imported goods into the U.S.,” said Joel Kan, an MBA economist, in a release. “Those factors resulted in the largest weekly decline in the 30-year fixed rate since November 2024. This is a period where we typically see purchase activity ramp up and purchase applications were up over the week and continued to run ahead of last year’s pace, more green shoots as we head into the spring homebuying season,” Kan added.

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Morning Report: Manufacturing weakens

Vital Statistics:

Stocks are lower as tariffs kick in and countries retaliate. Bonds and MBS are up.

The manufacturing economy weakened in February, according to the ISM Manufacturing Report. That said, manufacturing is in expansion mode after spending the last two years in contraction. New orders and backlog are contracting, while prices for commodities are rising. Uncertainty over tariffs are a major issue.

“U.S. manufacturing activity expanded marginally for the second month in a row in February after 26 consecutive months of contraction. Demand weakened, while output stabilized and inputs, for the first time in several months, contributed to PMI^® growth.Factory output marginally expanded compared to January, indicating that panelists’ companies are being cautious about ramping up output in the face of economic headwinds. The Employment Index moved back into contraction, as panelists’ companies continued to release workers. More companies cited ‘attriting down’ as the best process, with destaffing not as urgent as it was in the second half of 2024. Inputs — defined as supplier deliveries, inventories, prices and imports — revealed the first signs of supplier difficulties due to some pull-forward deliveries and discussions about who will pay for tariffs. Inventories recovered somewhat as a result.

“Demand eased, production stabilized, and destaffing continued as panelists’ companies experience the first operational shock of the new administration’s tariff policy. Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery stoppages and manufacturing inventory impacts. Although tariffs do not go into force until mid-March, spot commodity prices have already risen about 20 percent. Twenty-four percent of manufacturing gross domestic product (GDP) contracted in February, down from 43 percent in January. The share of manufacturing sector GDP registering a composite PMI^® calculation at or below 45 percent (a good barometer of overall manufacturing weakness) was 2 percent in February, a 6-percentage point improvement compared to the 8 percent reported in January.

Construction spending fell 0.2% MOM and rose 3.3% YOY in January. Residential construction fell 0.4% MOM and rose 3.1% YOY. Multifamily construction was down 12% on a YOY basis, while single family was down marginally.

The ISM Report and Construction spending report caused the Atlanta Fed’s GDP Now Model to forecast a 2.8% contraction in Q1. The Fed Funds futures are becoming more dovish with the markets now seeing a 11% chance of a rate cut at the upcoming meeting. For the December futures, the most likely outcome is 3 rate cuts, which would put the Fed Funds rate close to r-star, or the neutral rate of interest.

St. Louis Fed President Alberto Musalem is becoming concerned about growth.”The outlook for continued solid economic growth looks good, the labor market is healthy, and financial conditions are supportive. But recent data have been weaker than expected, especially consumer spending and housing market data, posing some downside risk to growth,” Musalem said in comments prepared for delivery to a National Association for Business Economics conference.

“Recent anecdotal reports from business contacts are more mixed, and some measures indicate that business activity has slowed, suggesting increased caution at least among some firms,” he said.

“While I continue to expect the economy to grow at a good pace in coming quarters, I would become concerned if we begin to see more evidence of a consumer pullback or a dampening of business confidence and investment plans,” Musalem said.

Friday’s jobs report looms large for the bond market. The Fed is happy with the current 4% rate of unemployment. It won’t tolerate it moving up much, especially with inflation back on the downtrend.

Morning Report: Big change in the Atlanta Fed GDP Now Model.

Vital Statistics:

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

The big event this week will be the jobs report on Friday. The street sees 160,000 jobs being added and the unemployment rate at 4%. Aside from the jobs report, we will get ISM data and productivity. Jerome Powell will speak on Friday.

The focus of Friday’s Personal Incomes and Outlays report was on the inflation numbers, but the lower-than-expected spending data caused the Atlanta Fed’s GDP Now Model to drastically revise down its estimate for Q1 GDP growth. The previous estimate of 2.3% growth was downgraded to a 1.5% contraction.

Hard to believe the model was predicting close to 4% growth in Q1 at the beginning of Feb and ended the month with a prediction for a 1.5% decline in GDP.

Of course the drop in spending might just be a bigger-than-normal post holiday debt payoff, and the model is reading too much into that data point. If spending is really slowing down, the Fed will want to stop tightening, which means about 75 basis points in cuts will be needed just to get to neutrality.

The Fed Funds futures now see a 25 basis point rate cut in June and and see between 50 and 75 basis points in cuts this year. With flat asking rents, shelter inflation should continue its decline, which was the big driver of inflation in the first place.

Bottom line: 2025 is looking a lot better than it was even a month ago, and I wouldn’t be surprised to see the MBS take up their origination estimates if this holds.

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.

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Morning Report: Incomes rise, spending falls, inflation decreases

Vital Statistics:

Stocks are higher after we got some benign inflation data. Bonds and MBS are up.

Personal incomes rose 0.9% MOM in January, according to the BEA. Personal spending fell by 0.2%. The PCE Price Index rose 0.3% month-over-month and 2.5% year-over-year. If you exclude food and energy, the PCE Price Index rose 0.3% MOM and 2.6% YOY.

The inflation numbers were more or less in line with street expectations, with the headline monthly rate a touch below expectations. The income number was way above expectations, while the spending number was way below. While one data point doesn’t define a trend, it looks like progress on inflation has started again.

The increase in income was driven primarily by government transfer payments, which was the cost-of-living increase in social security. The decrease in spending was primarily attributable to a decrease in motor vehicles.

Pending home sales fell 4.6% in January, according to NAR, which set an all-time low for the index which goes back to 2021. “It is unclear if the coldest January in 25 years contributed to fewer buyers in the market, and if so, expect greater sales activity in upcoming months,” said NAR Chief Economist Lawrence Yun. “However, it’s evident that elevated home prices and higher mortgage rates strained affordability.” In the south, pending home sales fell 9%, while the rest of the country was up or down a percent or so.

Rates increased in January, however with rate back down, this issue should reverse.

Notwithstanding the drop in sales, the inventory of homes for sale increased 27.5% in February. Listing prices were down about 0.8% compared to a year ago.

Morning Report: New Home Sales fall

Vital Statistics:

Stocks are higher this morning after good numbers from Nvidia. Bonds and MBS are up.

New home sales in January fell 1.1% YOY to a seasonally adjusted annual rate of 657,000. This was an 11% decrease compared to December. Sales increased in the South and West, while falling in the Northeast and the Midwest. The median new home sale price rose 3.7% to $446,300, while the average sale price fell 3.4% to $510,000. This indicates a shift away from luxury and more towards starter homes.

Fourth quarter GDP grew at 2.3% annually in the second revision, which was unchanged from the advance estimate. The consumer spending and investment components were revised downwards, while the government spending component was revised upwards.

Inflation was revised upward, with the quarterly PCE price index increasing 2.4% and the core rate increasing 2.7%. The headline number increased by 10 basis points and the core rate was revised upward by 20 basis points. Since these numbers are well in the past, it probably won’t affect the Fed’s outlook on inflation.

In other economic news, durable goods orders rose 3.1%, however they were flat if you strip out transportation orders. Initial Jobless Claims rose to 242k – presumably a lot of that is being driven by government workers being released by DOGE.

United Wholesale reported numbers yesterday, with fourth quarter volume of $38.7 billion and a gain on sale margin of 110 basis points. On the earnings conference call, CEO Mat Ishbia talked about the 2025 outlook:

So we think 2025 will be a better year. There’s more houses for sale. And then on the refi side, you’re talking about like there’s trillions of dollars that just need about a quarter lower rate than we are right now, like we’re not far off. The tenure is at 430, I think, ish. I always tell you 375 is where the money is at. But if it gets down closer to 4, you’re going to start seeing some of this, and we are prepared. And so we’re excited about the opportunity on refi. We’re going to continue to dominate on purchase, and we’re excited for what’s going to happen in 2025. We really think it’s going to be heck of a year.

I presume he is referring to the Fed Funds rate, and if you look at the Fed Funds futures, they are now predicting 50 basis points in cuts this year, with the second most likely outcome is 75.

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Morning Report: Consumer confidence tanks

Vital Statistics:

Stocks are flattish as we await earnings from Nvidia after the close. Bonds and MBS are down small.

Consumer confidence fell sharply in February, according to the Conference Board. Both the Present Situation index and the Expectations index fell. “In February, consumer confidence registered the largest monthly decline since August 2021,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “This is the third consecutive month on month decline, bringing the Index to the bottom of the range that has prevailed since 2022. Of the five components of the Index, only consumers’ assessment of present business conditions improved, albeit slightly. Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a ten-month high.”

The Expectations Index is back at levels usually associated with an impending recession. Inflation and tariff fears are the biggest drivers, though we are also seeing consumers become less constructive on the labor market.

Richmond Fed President Thomas Barkin said the fight against inflation is facing headwinds such as changing demographics and higher government spending. “If headwinds persist, we may well need to use policy to lean against that wind,” he said. In other words, rates may have to be higher for longer. “We learned in the ’70s that if you back off inflation too soon, you can allow it to re-emerge. No one wants to pay that price.”

The price differential between new construction and existing homes has disappeared, according to the NAHB. Limited inventory of existing homes is pushing median sales prices higher, while builder decisions (a focus on lower-priced offerings) is the driver for new homes. In the fourth quarter of 2024, the differential was only around $9,000 versus a $50,000 10 year average.

Mortgage applications fell 1.2% last week as purchases rose 0.2% and refis fell 3.6%. “Treasury yields moved lower on softer consumer spending data as consumers are feeling somewhat less upbeat about the economy and job market. This pushed mortgage rates lower, with the 30-year fixed rate decreasing to 6.88 percent, the lowest rate since mid-December,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Applications were about one percent lower for the week, which included the President’s Day holiday, as purchase applications stayed flat from a week ago while refinance applications saw a small decline. Purchase applications were up 3 percent from the same week last year. Increasing for-sale inventory in some markets has provided prospective buyers more options as we approach the spring homebuying season.”

Morning Report: Bonds continue to rally

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are continuing to rally.

We have seen quite the rally in the 10 year over the past few days. There doesn’t seem to be much in the way of news driving it, unless you think tariff fears are causing it. That said, the first order effect of tariffs should be higher rates, not lower rates. Tariffs = less international trade, and since we run a trade deficit with everyone that translates into less demand for Treasuries. Plus tariffs mean rising prices and higher inflation. Should be negative for bonds.

One possibility is that the Fed might pause quantitative tightening ahead of the debt ceiling debate as a safety measure, and people are getting ahead of that. Might be too clever by half, but it is a possible explanation.

I think the global economy is weakening, and you are seeing lower yields in Europe. The Fed Funds futures now see two cuts this year as the most likely scenario. The Atlanta Fed GDP Now model now sees 2.3% GDP growth in Q1, a far cry from the 3.9% rate it saw in early Feb.

While German Bund yields are up marginally this morning, we are seeing lower yields on UK Gilts, Japanese Government Bonds and Chinese Government Bonds. I suspect US yields are kind of tagging along.

Home prices fell 0.1% MOM and rose 3.9% YOY, according to the Case-Shiller Home Price Index. “It has been five years since the Covid-19 outbreak took hold of the global economy, sparking unprecedented volatility, massive fiscal and monetary stimulus, and a housing market that responded to national migratory changes in how we work and where we live,” says Brian D. Luke, CFA, Head of Commodities, Real & Digital Assets at S&P Dow Jones Indices. “National home prices have risen by 8.8% annually since 2020, led by markets in Florida, North Carolina, Southern California, and Arizona. While our National Index continues to trend above inflation, we are a few years removed from peak home price appreciation of 18.9% observed in 2021 and are seeing below-trend growth over the history of the index.”

MSAs like New York and Boston are doing the best right now, while MSAs like Tampa are down.

Home prices rose at a 4.5% annual rate in the fourth quarter, according to the FHFA House Price Index. “U.S. house prices grew at a slightly higher rate in the fourth quarter after three straight previous quarters of weaker appreciation,” said Dr. Anju Vajja, Deputy Director for FHFA’s Division of Research and Statistics. “The price growth accelerated during the quarter as the inventory of homes for sale tightened even further.”

Again, the Northeast did the best, with Connecticut, New Jersey, Vermont, and Rhode Island leading the charge.

Morning Report: Big week of data ahead

Vital Statistics:

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

The week ahead will be dominated by housing data and also the personal income / outlays number on Friday. The personal income data will include the PCE Price Index (which is the Fed’s preferred inflation gauge). Like the CPI a couple of weeks ago, expectations are going to be tough to beat, with the Street looking for a 2.5% annual increase in the headline number and a 2.6% annual increase in the core.

The first look at Q4 GDP will be released on Friday.

Existing home sales fell 4.9% in January, according to the NAR. On a year-over-year basis, sales rose about 2%. “Mortgage rates have refused to budge for several months despite multiple rounds of short-term interest rate cuts by the Federal Reserve,” said NAR Chief Economist Lawrence Yun. “When combined with elevated home prices, housing affordability remains a major challenge.”

“More housing supply allows strongly qualified buyers to enter the market,” Yun added. “But for many consumers, both increased inventory and lower mortgage rates are necessary for them to purchase a different home or become first-time homeowners.”

The median home price rose 4.8% YOY to $396,900. Days on market increased to 41 days. The first time homebuyer remains priced out, with their share falling to 28%. The inventory of for-sale homes was 1.1 million, or about 3.5 months worth of supply.

Consumer confidence fell in February, according to the University of Michigan Consumer Sentiment Survey. The decline was across the board, and particularly evident in buying conditions for durable goods. As expected, there was a partisan angle to the survey, with Republicans registering no change in expectations for the long-run economy and Democrats becoming more pessimistic.

Year-ahead inflationary expectations jumped markedly, rising from 3.3% to 4.3%. This is the highest reading since November 2023. Long-run inflationary expectations increased as well.

Mortgage delinquencies increased in February, according to the ICE Mortgage Monitor. Conforming delinquencies remain low, however we are seeing an uptick in FHA and VA DQs.

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.

Please reach out to brent@thedailytearsheet.com