The Daily Tearsheet

Morning Report: Leading Indicators fall

Vital Statistics:

Stocks are flattish this morning after the DOJ began investigating United Health for fraud. Bonds and MBS are up small.

The Index of Leading Economic indicators slipped 0.3% in January, which was below Street Expectations. “The US LEI declined in January, reversing most of the gains from the previous two months,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Consumers’ assessments of future business conditions turned more pessimistic in January, which—alongside fewer weekly hours worked in manufacturing—drove the monthly decline. However, manufacturing orders have almost stabilized after weighing heavily on the Index since 2022, and the yield spread contributed positively for the first time since November 2022. Overall, just four of the LEI’s 10 components were negative in January. In addition, the LEI’s six-month and annual growth rates continued to trend upward, signaling milder obstacles to US economic activity ahead. We currently forecast that real GDP for the US will expand by 2.3% in 2025, with stronger growth in the first half of the year.”

The manufacturing economy is improving as evidence by the ISM numbers and financial market indicators (stock market, credit spreads and the shape of the yield curve) became less bullish.

The housing market is becoming more balanced, with buyers having more leverage. The rolling 5 month supply is much higher than it has been the last few years. Granted some of this is due to depressed sales in general, but we are moving towards normalcy. Note that a balanced market is around 6 months worth of inventory, so it is still a seller’s market.

Single-family built-for-rent construction fell in the fourth quarter, according to the NAHB. BTR is a relatively small segment of the SFR universe, however with rents flatlining, you might see some of these units put on the market for sale.

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Morning Report: Parsing the FOMC minutes

Vital Statistics:

Stocks are lower this morning after poor guidance from WalMart. Bonds and MBS are up.

WalMart’s guidance provides a warning that the consumer might be tapped out, which is bad news for the economy overall.

The FOMC minutes were released yesterday. The main points:

Further rate cuts are on hold until we have more clarity on inflation.
Risk is weighted to the upside (higher inflation) than the downside (economic weakness)
Potential tariffs give the Fed an excuse to stand pat.
The Fed might put balance sheet runoff (QT) on hold until we have clarity on the debt ceiling.

The points in context:

A number of participants remarked that current readings of 12 month inflation were boosted by relatively high inflation readings in the first quarter of last year, and several participants noted that cumulative inflation over the past 3, 6, or 9 months showed greater progress than 12-month measures. Most participants commented that month-over-month inflation readings in November and December had exhibited notable progress toward the Committee’s goal of price stability, including in some key subcategories. Many participants, however, emphasized that additional evidence of continued disinflation would be needed to support the view that inflation was returning sustainably to 2 percent.…

Participants generally pointed to upside risks to the inflation outlook. In particular, participants cited the possible effects of potential changes in trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household spending.

In discussing the outlook for monetary policy, participants observed that the Committee was well positioned to take time to assess the evolving outlook for economic activity, the labor market, and inflation, with the vast majority pointing to a still-restrictive policy stance. Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.

Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event.

In other economic news, initial jobless claims rose to 219k last week, while the Philadelphia Fed Manufacturing Survey dropped below expectations.

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Morning Report: Housing starts fall

Vital Statistics:

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

Housing starts fell to a seasonally adjusted annual rate of 1.366 million in January. This is a 9.8% decreased compared to December, and a 0.7% decrease on a year-over-year basis. Building Permits were flat at 1.48 million.

Homebuilder sentiment crashed in February, according to the NAHB Housing Market Index. Blame Tariffs. “While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan. “Uncertainty on the tariff front helped push builders’ expectations for future sales volume down to the lowest level since December 2023. Incentive use may also be weakening as a sales strategy as elevated interest rates reduce the pool of eligible home buyers.”

“With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs,” said NAHB Chief Economist Robert Dietz. “Reflecting this outlook, builder responses collected prior to a pause for the proposed tariffs on goods from Canada and Mexico yielded a lower HMI reading of 38, while those collected after the announced one-month pause produced a score of 44. Addressing the elevated pace of shelter inflation requires bending the housing cost curve to enable adding more attainable housing.”

So the HMI report was positively impacted by the 30 day suspension of tariffs.

Mortgage applications fell 6.6% last week as purchases fell 6% and refis fell 7%. “Mortgage rates decreased on average over the week, as markets brushed off unexpectedly strong inflation data. Despite mortgage rates declining, with the 30-year fixed mortgage rate dropping to 6.93 percent, mortgage applications decreased to their slowest pace since the beginning of the year,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications were down for the week, as buyers remained on the fence, although loosening inventory may help support activity in the coming months. Refinance applications had been rising in previous weeks but dipped as rates remained close to 7 percent.”

Morning Report: The Atlanta Fed moves down its estimate for Q1 GDP growth.

Vital Statistics:

Stocks are higher as investors return from the long weekend. Bonds and MBS are down small.

The week ahead won’t have much in the way of market-moving data, however we will get some housing data with housing starts and existing home sales. We will also get the FOMC minutes and leading indicators.

The lousy retail sales report caused the Atlanta Fed to mark down its forecast for Q1 GDP growth to 2.3%. The LEI report this Thursday should be an interesting data point to see if any further weakness is being felt in the economy.

If the economy is weakening, then the Fed will probably want to get the Fed Funds rate to a neutral stance sooner, rather than later. Despite the pause in rate cuts, the Fed Funds rate is still roughly 75-100 basis points above r-star (or the neutral rate of interest) where the Fed Funds rate neither stimulates nor tightens.

Federal Reserve Governor Chris Waller said the Fed should continue cutting rates if inflation continues to move back towards 2%. “If this wintertime lull in progress is temporary, as it was last year, then further policy easing will be appropriate,” Waller said, according to a published text of his remarks.

Over the past several years, inflation has been front-loaded in Q1 and then slowly backed off and bottomed during the fall. The CPI rose only 0.3% MOM in January, which is way less than 2022, 2023, and 2024.

“We must keep in mind that there is always a degree of uncertainty about economic policy, and we need to act based on incoming data even when facing great uncertainty about the economic landscape,” Waller said. “We have done this in the past and will continue to do so in the future.”

The Fed Funds futures see little chance of a rate cut at the March FOMC meeting, and still see the base case as one more rate cut for 2025.

Morning Report: Retail Sales fall

Vital Statistics:

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

Retail Sales fell 0.9% in January, according to the Census Bureau. Sales were up 4.2% compared to a year ago. If you strip out vehicles and gas, retail sales fell 0.5%. Both numbers were below expectations. On a year-over-year basis, the headline number rose 4.2%. Ex-vehicles and gas they rose 3.9%.

Retail sales are not adjusted for inflation, so sales rose modestly on a YOY basis.

Industrial production rose 0.5% in January, according to the Federal Reserve. Manufacturing production fell 0.1%. Capacity Utilization rose from 77.7% to 77.8%.

Total household debt increased by 0.5% in Q4. Delinquencies are increasing however. “While mortgage delinquency rates are similar to pre-pandemic levels, auto loan delinquency transition rates remain elevated.” said Wilbert van der Klaauw, Economic Research Advisor at the New York Fed. “High auto loan delinquency rates are broad-based across credit scores and income levels.” The NY Fed estimates that there was $465 billion in mortgage origination during the quarter.

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Morning Report: The PPI comes in hot

Vital Statistics:

Stocks are higher this morning despite a hotter-than-expected PPI report. Bonds and MBS are up.

Inflation at the wholesale level rose 0.4% MOM in January, which was above the 0.3% expectation. If you strip out food and energy, the index rose 0.3%, which was in line with expectations. Transportation and warehousing rose 0.6%, which accounted for a third of the increase. These were probably beginning-of-the-year price hikes, along with an increase in the price of diesel.

“Wholesale price growth came in slightly higher than expected for January, and the read for December was adjusted upward,” said Elizabeth Renter, senior economist at personal finance site NerdWallet. “In other words, inflation at the producer level remains high, and one concern is that this inflation could ultimately be passed along to consumers.”

Termination notices have been sent out to dozens of employees at the Consumer Financial Protection Bureau. These employees were already on probation, so they were probably on their way out any way. Needless to say, the bureaucrats are fighting back.

“This is an unlawfully-executed mass firing,” said Johanna Hickman, senior CFPB litigation counsel who said she received the agency’s dismissal notice. “It’s almost certainly the first salvo in the dismantling of this agency, and a significant percentage of the federal workforce.”

Hickman, who said she started in her CFPB role in June of 2023, said the agency’s new leadership didn’t follow established federal protocol for dismissing probationary employees. “A lot of us are prepared to fight, and we are examining all our legal avenues,” she said.

Whatever the final outcome for the CFPB is, hopefully it means an end to regulation by enforcement, which is akin to a highway with no speed limit signs. The only way to find out the speed limit is to get a ticket.

The Spring Selling season is getting off to a sluggish start as new listings are up 7% and pending sales are down 6%. The increase in new listings is the highest since early 2022, which might indicate that the rate lock-in-effect is easing. It is taking 57 days to get to contract, which is the slowest since March of 2020. Month’s supply is 4.4, which is back to pre-pandemic levels.

“I’ve met with a lot of potential sellers over the last few weeks. Listings typically pick up in March or April, but this year it’s happening earlier,” said Fernanda Kriese, a Redfin Premier agent in Las Vegas. “Some of the sellers are listing because they bought just a few years ago and their home value isn’t increasing as quickly as they’d like, so they’re cutting their losses and moving to a less expensive home. Some are retirees who are downsizing. Buyers have been sidelined this year because of high mortgage rates and uncertainty surrounding politics and the economy, but some are starting to come off the fence.”

Eventually life intrudes and people have to move regardless of the mortgage rate. Don’t forget mortgage rates were in the teens in the early 80s, and relocations, downsizings, etc. still happened.

Morning Report: Inflation disappoints.

Vital Statistics:

Stocks are flat after the CPI came in higher than expected. Bonds and MBS are down.

Consumer prices rose 0.5% MOM in January, according to the BLS. This was higher than the 0.3% Street expectation. The core rate rose 0.4%. Given that we have typically seen a bump in January as companies raise prices in the new year, a 0.3% increase was probably tough to get. On a year-over-year basis, the headline rate rose 3% and the core rate rose 3.3%.

The shelter index rose 4.4% on a YOY basis, the smallest increase since January, 2022. Transportation (especially motor vehicle insurance) was up 8% on a YOY basis.

The bond market sold off pretty heavily on the number, with the 10 year yield rising about 10 basis points. That said, sentiment in the bond market remains lousy given the tariff backdrop, and rates are up big in Europe and Asia today.

I showed the chart below yesterday, which gives an idea of how much annual inflation is front-loaded in the first quarter, and how inflation seems to tail off as the year goes on. I put a red line on the chart to show the January of 2025 number. The 0.3% expectation was basically a heavy lift, given that pre-pandemic January inflation typically came in at that level, but we are close. Things are improving.

Jerome Powell testified in front of the Senate yesterday as part of his semiannual Humprey-Hawkins testimony. Here are his prepared remarks.

With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will assess incoming data, the evolving outlook, and the balance of risks.

The March Fed Funds futures see little to no chance of a rate cut, and the December futures see a 32% chance of no cuts this year. The bottom line is that rates are still restrictive but as long as the economy continues to behave they will remain that way.

Mortgage applications rose 2.3% last week as purchases fell 2% and refis rose 10%. “Mortgage rates moved slightly lower last week, which led to the pace of refinance applications reaching its strongest week since October 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The average loan size for refinance borrowers increased, as these borrowers tend to be more responsive for a given change in rates. Purchase applications were down from the previous week’s level but were slightly ahead of last year’s pace. The average loan size for a purchase application increased to its highest level since March 2022 at $456,100, partially driven by fewer FHA purchase applications but more VA loans compared to the previous week.”

Morning Report: Awaiting Jerome Powell

Vital Statistics:

Stocks are lower as Jerome Powell heads to the Hill for his semiannual Humphrey Hawkins testimony. Tariffs will be a big subject of discussion. Bonds and MBS are down.

Small Business Optimism fell in January, according to the NFIB. Uncertainty was a big driver of the decrease, which caused business owners to scale back plans to expand and buy inventory. A shortage of skilled labor remains a problem, especially for manufacturing and construction. “Overall, small business owners remain optimistic regarding future business conditions, but uncertainty is on the rise,” said NFIB Chief Economist Bill Dunkelberg. “Hiring challenges continue to frustrate Main Street owners as they struggle to find qualified workers to fill their many open positions. Meanwhile, fewer plan capital investments as they prepare for the months ahead.”

Inflationary expectations were unchanged in January at 3%, according to the New York Fed. We are almost back to pre-pandemic levels. This is in contrast to the University of Michigan Survey which showed a marked pickup.

We will get the CPI report tomorrow, and a big focus will be on end-of-the-year price hikes. This has caused outsized increases in January inflation reports over the past couple of years. “We don’t know whether 2025 has brought another such bump. But if inflation rises, it will be a signal that monetary policy has more work to do,” said Dallas Fed President Lorie Logan in a speech last week.

Note that the Street expectation for tomorrow’s CPI report is 0.3%, so the bet is that we won’t see such a bump this time around. Shelter inflation continues to fall.

Morning Report: CPI week

Vital Statistics:

Stocks are higher this morning despite further potential tariffs. Bonds and MBS are flat.

The week ahead will be dominated by Jerome Powell’s semiannual Humphrey-Hawkins testimony and the CPI release. Powell will be speaking Tuesday and Wednesday, and the CPI is out on Wednesday.

Powell’s testimony on Capitol Hill will probably focus on tariffs and their potential effect on monetary policy. I think the CFPB could be a topic for discussion as well, since it is funded by the profits of the Federal Reserve. Note the term “profits,” not “revenue.” Since the Fed has lost money ever since rates have increased – these are mark-to-market losses on its portfolio of MBS and Treasuries – that theoretically funding for the CFPB is legally questionable.

Consumer sentiment fell in early February, according to the University of Michigan Consumer Sentiment Survey. Much of this decline was due to tariff threats and the potential of seeing an increase in inflation. Inflation expectations over the next year increased from 3.3% to 4.3%, while longer-run expectations rose from 3.2% to 3.3%. Note that the interviews concluded on February 4th, so this was before the Mexican and Canadian tariffs were put on hold.

Inflationary expectations continue to increase, which will concern the Fed:

Asking rents fell 0.1% in January on a YOY basis, according to Redfin. Declining shelter inflation will go a long way towards getting inflation back to 2%, although any inflationary effects from tariffs will offset that.

“Rental supply and demand are in lockstep, which is keeping rent growth at bay, but that may not last long,” said Redfin Senior Economist Sheharyar Bokhari. “Apartment construction could be further hampered by new tariffs on building materials. At the same time, demand for apartments continues to grow as high mortgage rates and housing prices push homeownership out of reach for many Americans. Rents will tick up if demand starts to outpace supply in a meaningful way.”

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Morning Report: Payrolls disappoint

Vital Statistics:

Stocks are flattish this morning after the jobs report. Bonds and MBS are down.

The economy added 143,000 jobs in January, which was below expectations. December and November were revised upward by 110,000. The unemployment rate fell to 4.1%, which was driven primarily by statistical adjustments. The BLS finished their annual revision of the population survey, and this year’s revisions were larger than in the past. The change caused the number of people actually employed at the end of January to be 2.2 million higher than at the end of December. I am not sure what the mechanics are here, but it will be hard to interpret this report given that there is a lot of noise in it. It looks like BLS bumped up the population numbers and the number of employed people. The number of unemployed fell slightly, which accounts for the drop in the rate.

Average hourly earnings rose 3.9% on a YOY basis, which was below expectations. Average hourly earnings rose 4.1% in December. Bonds sold off about 3 basis points on the number, probably due to the drop in the unemployment rate.

Mortgage delinquencies increased to 3.98%, a bump of 10 basis points compared to last year. “Although mortgage delinquencies rose only ten basis points in the fourth quarter of 2024 compared to one year ago, the composition of the delinquencies changed,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Conventional delinquencies remain near historical lows, but FHA and VA delinquencies are increasing at a faster pace. By the end of the fourth quarter, the spread between the FHA and conventional delinquency rates reached 841 basis points, while the VA and conventional spread was 208 basis points.”

Added Walsh, “Government loans are also rolling to later stages of delinquency. Compared to one year ago, the seriously delinquent rate rose seventy basis points for FHA loans and fifty-seven basis points for VA loans, but only two basis points for conventional loans.”

Home prices rose 3.4% YOY in December, according to CoreLogic. “Home prices have remained flat since the housing market began seeing slower activity this past summer. Bifurcation across markets has also persisted. Northeastern markets drove appreciation growth due to low inventories of homes for sale while Southern markets readjusted to higher inventories and increases in variable mortgage costs, such as taxes and insurance. Home prices are also cooling in the markets in Mountain West, which have been trying to find stability over the last year following the surge in mortgage rates and price declines from pandemic highs. Despite the difficult housing markets conditions in 2024, home prices increased about 4.5% over the course of the year, a small jump compared to the 4.1% uptick in 2023. Going forward, with inventories slowly improving and mortgage rates remaining elevated, forecasts suggest a smaller overall increase in prices in 2025.”

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