The Daily Tearsheet

Vital Statistics:

Stocks are flattish despite a decent CPI print. Bonds and MBS are up small.

We have a 10 year auction at 1:00 this afternoon.

Prices at the consumer level rose 0.1% MOM and 2.4% YOY according to the Consumer Price Index. The core rate, which excludes food and energy, rose 0.1% MOM and 2.3% YOY. All of these numbers were better than expectations.

Shelter rose 0.3% MOM and 3.9% YOY and accounted for most of the increase in inflation. Overall, the CPI continues to work its way lower and is gradually approaching the Fed’s target rate.

Of course this probably won’t make any difference for the Fed, but so far the effect of tariffs has yet to show up in the inflation data. In fact, inflation is still falling, not increasing.

The Fed is not expected to cut rates next week, however we are still tight by 100 basis points in the Fed Funds rate.

Mortgage applications rose 12.5% last week as purchases rose 10% and refis increased 16%. Note there is an adjustment to the data for the Memorial Day holiday. “Coming out of the Memorial Day holiday, mortgage applications increased to the highest level in over a month, driven by growth in both purchase and refinance applications. Treasury rates saw some movement during the week, which resulted in additional opportunities for borrowers,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The rate for 15-year fixed rate loans and FHA loans saw declines last week, while the 30-year fixed rate was largely unchanged. Purchase applications were 20% ahead of last year’s pace, continuing to show strength compared to a year ago. Despite ongoing uncertainty surrounding the economy, homebuyers seem to be taking advantage of loosening housing inventory in certain markets.”

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The US apparently has a deal with China to supply rare earth elements and magnets, and is close to a trade deal. In return, the US will allow Chinese students to attend US universities.

Vital Statistics:

Stocks are flattish this morning as riots continue in LA. Bonds and MBS are up.

Small business optimism improved in May, according to the NFIB. Expected business conditions and sales expectations were the driver of the increase. Taxes are the biggest concern (read tariffs), while quality of labor and regulatory red tape remain problems. A net 25% of small businesses reported raising prices, which was unchanged from April.

The economy continues to grow (minus the hiccup in Q1), and
GDP growth models indicate that it will continue to do so,
although at a much slower pace. The services sector (labor
intensive) is showing some weakness by way of the ISM Services
Index. Congress hasn’t passed the Big Beautiful Bill yet, and
Trump is still messing with tariffs, the uncertainty level is rising.
While tariffs might be a bumpy road while countries negotiate
trade deals, Congress can do their part by passing the BBB
sooner rather than later to take that piece of uncertainty off the
table. The labor market is softening, including compensation
pressures. The prospects for strong future job growth are not
great. Overall, the economy will continue to stumble along until
the major sources of uncertainty are resolved. It’s hard to steer a
ship in the fog.

Inflationary expectations fell in May, according to the NY Fed Survey of Consumer Expectations. The year-ahead inflation expectation fell 0.4% to 3.2%, while the 3-year expectation fell 0.2% to 3.0%. The 5 year expectation came in at 2.6%. Home price appreciation and commodity price inflation fell as well.

About 40.8% of respondents think that unemployment will be higher a year from now, which is somewhat higher than the long-term average of 37.7%. Consumers anticipate their incomes will rise by 2.7% and they see spending rising by 5%.

We will get the University of Michigan Consumer Sentiment Survey this Friday, and they have been getting much higher inflationary expectations. In the latest survey, UMich sees year-ahead inflationary expectations coming in at 6.6% and longer-term expectations at 4.4%.

The NY Fed numbers are closer to what we are seeing in market-based inflation expectations, so I suspect UMich has some partisan imbalances in their sampling methodology.

CEOs are becoming more sanguine on the state of the economy, according to a survey by the Chief Executive Officer Survey. The number of CEOs anticipating growth this year rebounded from 22% “From the macro, the worst concerns, I think, have passed,” Home Depot CEO Edward Decker said last month. “We’ve gone from a dynamic of where we were going to have a near certain recession and stock market correction in early April, to where today stock markets fully recovered (and) recession expectations are way down in the past month.”

Asking rents are falling in 28 major US metros, according to research from Redfin. The median US asking rent fell 1% year-over-year in May to $1,633. This was up 0.5% on a month-over-month basis.

“Apartment construction in America has been hovering near a 50-year high, and even though renter demand is strong, it’s not keeping pace with supply,” said Redfin Senior Economist Sheharyar Bokhari. “Many units are sitting vacant for months, which means renters have power to negotiate concessions and landlords have less leeway to keep rents high.”

The vacancy rate for 5+ unit buildings hit 8.2% in the first quarter – the highest since early 2021. We are seeing big declines in Austin, Columbus, Nashville, Minneapolis and Portland. The strongest rental markets were Cincinnati, Tampa, St. Louis, Pittsburgh and Birmingham.

Vital Statistics:

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

The week ahead will be dominated by the consumer price index on Wednesday and the producer price index on Thursday. We are in the quiet period ahead of next week’s FOMC meeting so there won’t be any Fed speakers.

The Street is looking for the CPI to increase 0.2% MOM and 2.3% YOY on the headline number and 0.3% / 2.9% on the core rate. This is an expected increase from the April numbers.

Despite the stronger-than-expected jobs report, Donald Trump urged Jerome Powell to cut interest rates by a percentage point. “Go for a full point, Rocket Fuel!” Trump wrote in a Truth Social post. This post coincided with the European Central Bank’s decision to cut rates.

As I talked about on Friday, the internals of the jobs report were really not that great. We saw a pretty big decline in the number of people actually collecting paychecks, and the labor force participation rate fell. Fed policy is still tight by about 100 basis points.

Philly Fed President Patrick Harker said on Friday that “moderately tight” policy is correct. “Taking a pre-emptive action on hypotheticals, rather than what the hard data is telling us, is a mistake,” he said referring to the fact that inflation is still above the Fed’s 2% target.

If inflation continues to fall, and the tariff effect doesn’t cause higher inflation cutting rates may be appropriate later in the year. Of course the risk is that the Fed overshoots and causes a recession.

Trade talks between China and the US begin this week and run through Friday. The US wants to see an end to export controls for rare earth elements while China wants access to jet engines and technology.

Vital Statistics:

Stocks are higher after the jobs report came in stronger than expected. Bonds and MBS are down.

The economy added 139,000 jobs in May, which was a decline from the downwardly-revised 147,000 additions in April. This was above the 129k Street expectation and much higher than the numbers reported by ADP.

The unemployment rate was flat at 4.2%, however the labor force participation rate declined by 0.2% and the employment-population ratio slipped by 0.3%. IMO these numbers show a deterioration in the labor market. The table below is based on the household survey.

The population increased by 188k, while the labor force fell by 625k. Granted this appears to just reverse April’s spike, but it cannot be ignored. The number of people collecting paychecks fell by almost 700k, while the number of people not in the labor force rose by 813k. This is a continuation of the longstanding trend where “jobs created” are really illusory. They are based on statistical adjustments to the data based on births, deaths, immigration and not on people collecting paychecks. I suspect this is why we keep getting these huge differentials between the ADP jobs report and BLS data.

Average hourly earnings rose 0.4% MOM and 3.9% YOY which was a little hotter than expectations. FWIW, this jobs report will be treated in the press as “better than expected,” which is why the bond market is having an allergic reaction. That said, the internals are not that great. But given the current “sell first, ask questions later” psychology of the bond market, it doesn’t matter. Nor will it matter to the Fed, which is using every excuse in the book to keep policy tight in the face of a weakening economy.

The Trump Administration had trade talks with China and “resulted in a very positive conclusion for both Countries,” according to a post on Truth Social. China is frustrated with Trump’s executive order to restrict Chinese visas for colleges. Note that a judge has apparently blocked this order.

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Vital Statistics:

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

Home prices rose 1.4% quarter-over-quarter and 4.2% year-over-year according to the Clear Capital Home Data Index. The Northeast performed the best on a YoY basis, increasing 1.8% QoQ and 7.3% YoY, while the South performed the worst, where prices rose 0.8% QoQ and 2.1% YoY.

The Clear Capital Home Data Index is based on a repeat-sales methodology and a price per square foot model. It is faster than the competing indices like Case-Shiller and FHFA.

In the accompanying commentary, I discuss a couple major trends that are affecting real estate prices. Check it out.

Economic activity declined from late April to early June, according to the latest Fed Beige Book. It looks like about half the districts reported a decline, while 3 reported no change and reported growth. Employment was weaker: “All Districts described lower labor demand, citing declining hours worked and overtime, hiring pauses, and staff reduction plans. Some Districts reported layoffs in certain sectors, but these layoffs were not pervasive”, while prices rose moderately. Most districts expected prices to accelerate upward due to tariffs.

Wells reported that the Fed has removed the cap on asset growth imposed in 2018. “The Federal Reserve’s decision to lift the asset cap marks a pivotal milestone in our journey to transform Wells Fargo. We are a different and far stronger company today because of the work we’ve done,” said Wells Fargo CEO Charlie Scharf. “In addition, we have changed and simplified our business mix, and we have transformed the management team and how we run the company. We have been methodically investing in the company’s future while improving our financial results and profile. We are excited to continue to move forward with plans to further increase returns and growth in a deliberate manner supported by the processes and cultural changes we have made.”

More evidence of a weakening labor market: job cuts rose 47% compared to a year ago. They fell on a MOM basis compared to April however. “Tariffs, funding cuts, consumer spending, and overall economic pessimism are putting intense pressure on companies’ workforces. Companies are spending less, slowing hiring, and sending layoff notices,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas.

Government spending decreases (i.e. DOGE) remains the biggest reason for job cuts.

Separately, initial jobless claims rose to 247k last week, above expectations.

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Vital Statistics:

Stocks are lower this morning after 50% tariffs on steel and aluminum go into effect. Bonds and MBS are up.

The private sector added only 37,000 jobs in May, according to the ADP Employment Report. This is well below the consensus of 110,000, and the 129,000 expectation for Friday’s jobs report. “After a strong start to the year, hiring is losing momentum,” said Dr. Nela Richardson, chief economist,
ADP. “Pay growth, however, was little changed in May, holding at robust levels for both job-stayers and job-changers.”

I am sure tariff uncertainty played a part, with employers holding off on adding people until there is further clarity, however there is a possibility that the Fed stayed too long at the party and has started to push the economy into a recession.

Job openings increased from 7.2 million to 7.4 million, according to the BLS. On a year-over-year basis, job openings fell from 7.6 million. The quits rate fell from 2.1% to 2.0%, which signals that wage inflation is going to moderate.

Mortgage applications fell 4% last week as purchases and refis fell by the same amount. There was an adjustment for the Memorial Day holiday. “Most mortgage rates moved lower last week, with the 30-year fixed rate declining to 6.92 percent and staying in the 6.8 percent to 7 percent range since April,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Mortgage applications decreased over the week but continue to exhibit annual gains, with purchase applications running 18 percent ahead of last year’s place. Government purchase applications were little changed over the week driven by a slight increase in FHA purchase applications. Refinance activity fell across both conventional and government segment and the overall average refinance loan size was the smallest since July 2024, as potential borrowers hold out for larger rate drops.”

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The services economy improved in April, according to the ISM Services Index. This was largely a reversal of March’s decline which was driven by tariffs. New orders improved, while activity slowed. The prices index increased, driven by tariffs.

“April’s change in indexes was a reversal of March’s direction, with increases in three (New Orders, Employment and Supplier Deliveries) of the four subindexes that directly factor into the Services PMI^®. Of those four, only the Business Activity Index had a lower reading compared to March. Employment continues to be the only one of these subindexes in contraction territory, with two straight months of contraction. From December through February, all four subindexes were in expansion. Regarding tariffs, respondents cited actual pricing impacts as concerns, more so than uncertainty and future pressures. Respondents continue to mention federal agency budget cuts as a drag on business, but overall, results are improving.”

Vital Statistics:

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

The OECD cut their growth outlook for the US from 2.2% to 1.6% based on the impact of tariffs, decreased immigration and a smaller Federal workforce. Global growth forecasts were also cut. “Global GDP growth is projected to slow from 3.3% in 2024 to 2.9% this year and in 2026 … on the technical assumption that tariff rates as of mid-May are sustained despite ongoing legal challenges,” the OECD said.

That said, the longer-term forecast, at least for the US is better as AI should prove to be a significant boost to productivity. “I think if we are able to get trade agreements between countries, not only between China, United States, but also other parts of the world and if we are able to reduce uncertainty, we do believe that we might be on the cusp of something quite significant,” Pereira said.

The AI-driven productivity boost will probably affect the US more than the rest of the world, which will increase the economic gap between the two areas. In fact, the cost-effectiveness of AI will probably lead to a lot of knowledge jobs overseas being re-shored to the US.

The manufacturing economy contracted in May, according to the ISM Manufacturing Survey.  “In May, U.S. manufacturing activity slipped further into contraction after expanding only marginally in February. Contraction in most of the indexes that measure demand and output have slowed, while inputs have started to weaken.”

Demand indicators like new orders and backlog remain muted, however inventories are low which is historically a good indicator of growth ahead. Production indicators improved from exceptionally low readings in the month before. That said, production has been weak for a while and predates the tariff issues. Input indicators also fell.

Overall, tariffs are wreaking havoc on the manufacturing sector, however if we get some trade deals over the next 90 days, this should prove temporary and manufacturing could provide a boost going into the latter half of 2025.

Mortgage delinquencies ticked up a basis point to 3.22% according to the ICE Mortgage Monitor. Foreclosure starts increased 13% on a YOY basis. The ICE Mortgage monitor uses McDash data, which excludes some of the FHA universe, so DQs might be a bit higher.

Construction spending fell 0.4% MOM and 0.5% YOY. Residential construction fell 0.9% MOM and 4.8% YOY driven by multifamily which fell 11.3% on a YOY basis.

Vital Statistics:

Stocks are lower this morning as the US and China accuse each other of undermining trade negotiations. Bonds and MBS are down.

Trump is doubling tariffs on steel and aluminum, which is also weighing on sentiment this morning.

The upcoming week will be dominated by the jobs report on Friday. We will also get ISM data and productivity numbers. It doesn’t look like we have a lot of Fed speakers on the calendar.

Consumer sentiment was unchanged in May according to the University of Michigan Consumer Sentiment Survey. The pause in the trade wars was probably the biggest driver, although personal finances did suffer somewhat. Consumer sentiment stopped falling, however it hasn’t started to improve yet.

Year-ahead inflation expectations rose to 6.6% from 6.5%, however long-term inflation expectations fell from 4.4% to 4.2%. It appears that tariff news is still the big driver of sentiment, and the budget that is working its way through Congress is not.

Fed Governor Christopher Waller said he supported “good news” rate cuts later this year, provided that any inflation bump caused by tariffs was short-lived. He said that he didn’t see a recession on the horizon, and that any rate cuts will be motivated by declining inflation, not economic weakness.

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Vital Statistics:

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

Personal incomes rose 0.8% MOM in April, which was much higher than the 0.3% street expectation. Spending rose 0.2%, which was in line with expectations.

The PCE Price Index increased marginally on a MOM basis from 0% to 0.1% on both the headline number and the core number. On an annualized basis, YOY inflation declined from 2.3% to 2.1% and the core rate fell from 2.6% to 2.5%.

It does look like the rebound inflation from Q424 to Q125 is over, and the headline rate is pretty much back to the Fed’s target rate. The core rate in the lowest in a year.

A Federal Appeals Court allowed Trump’s tariffs to remain in affect while the International Trade Court’s decision is appealed. This will keep negotiations on track and allow the administration time to come up with deals with our trading partners.

There are other legal arguments the Administration could make as well, so the tariff issue is not completely eliminated, but will probably be narrowed. The bond market is certainly taking it that way. “Even if we lose, we will do it another way,” Trump trade advisor Peter Navarro told reporters at the White House on Thursday afternoon.

Pending Home Sales fell 6.3% in April, according to NAR. “At this critical stage of the housing market, it is all about mortgage rates,” said NAR Chief Economist Lawrence Yun. “Despite an increase in housing inventory, we are not seeing higher home sales. Lower mortgage rates are essential to bring home buyers back into the housing market.”

There is a bifurcation in the market, as we are seeing more home price appreciation in the more affordable MSAs, especially in the Midwest. “Home buyers have a better chance to purchase homes in affordable regions such as the Midwest, where the typical home price is $313,000 – 25% below the national median home price,” added Yun. “Moreover, with housing inventory levels reaching five-year highs, home buyers in nearly every region of the country are in a better position to negotiate more favorable terms.”

The Northeast is also seeing renewed growth as it underperformed the South and West Coast for the post-2008 period and has seen very limited building.

Vital Statistics:

Stocks are higher this morning after a court blocked Trump’s sweeping tariffs. Bonds and MBS are down small.

A Federal Court ruled that the President does not have the authority to impose such sweeping tariffs under the International Emergency Economic Powers Act of 1977. The Administration will appeal the decision, but it sounds like tariffs are dead in the water as of now. The Administration could instead re-impose tariffs under a different justification, the Section 301 of the Trade Act of 1974, which allows for tariffs that counter unfair foreign trade practices. He used the latter as justification for tariffs against China during his first administration, and it is thought to be on more solid legal ground.

Bonds are selling off on this news, which is counterintuitive, however it seems to be part of a global risk-on trade. Overall this news is good for bonds, and if this truly is the end of mass tariffs, the Fed is out of excuses to keep rates high. Overall this should be bond bullish and we should see rates work their way lower over the summer.

The FOMC minutes were released yesterday, and they confirmed the higher for longer story.

Participants observed that, even though swings in net exports had affected the data, the available data indicated that economic activity had continued to expand at a solid pace and labor market conditions continued to be solid, but inflation remained somewhat elevated. Participants assessed that the tariff increases announced so far had been significantly larger and broader than they had anticipated. Participants observed that there was considerable uncertainty surrounding the evolution of trade policy as well as about the scale, scope, timing, and persistence of associated economic effects. Significant uncertainties also surrounded changes in fiscal, regulatory, and immigration policies and their economic effects. Taken together, participants saw the uncertainty about their economic outlooks as unusually elevated. Overall, participants judged that downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases.

In other words, the -0.2% decrease in Q1 GDP is being dismissed as tariff-driven, and is not a consideration for cutting rates. They noted that inflation’s downtrend had been uneven, spiking a touch at the end of 2024. Trump’s shock and awe tariff announcement caught them by surprise, and therefore they are being cautious. The FOMC meeting was May 6 and 7, so this was prior to the May 12th delay on tariffs.

With respect to policy:

In considering the outlook for monetary policy, participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the Committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity. Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer.

Participants noted that monetary policy would be informed by a wide range of incoming data, the economic outlook, and the balance of risks. In discussing risk-management considerations that could bear on the outlook for monetary policy, participants agreed that the risks of higher inflation and higher unemployment had risen. Almost all participants commented on the risk that inflation could prove to be more persistent than expected.

Participants emphasized the importance of ensuring that longer term inflation expectations remained well anchored, with some noting that expectations might be particularly sensitive because inflation had been above the Committee’s target for an extended period. Participants noted that the Committee might face difficult tradeoffs if inflation proves to be more persistent while the outlooks for growth and employment weaken.

Despite the pause in tariffs, the Fed remains resolute in its plan to hold off on getting to neutral policy as long as it can. The Fed is risking a recession and seems content to err on the side of being too tight for too long. This puts pressure on Trump to cut deals, as time is not on his side. The longer the Fed tightens, the greater the chance the economy slips into a recession. For those in the mortgage business, this means the famine might last a few more months, but the longer the Fed waits to ease, the more likely it will have to cut deeply and quickly.

I wonder if the Trade Court ruling, which enjoins Trump’s tariffs will factor into the Fed’s decision-making. Presumably, a suspension of tariffs would mean the Fed has the runway to get to r-star and lower rates by 100 basis points.

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Q1 GDP was revised upward from -0.3% to -0.2% in the second revision. Investment was revised upward, while consumer spending was revised downward. In the graph below, you can see what the Fed was talking about when they characterize the number as “tariff-driven.”

The drag on GDP was the sharp increase in imports, which subtract from GDP. This was presumably consumers and businesses accelerating purchases to get in before price increases. Similarly, the big jump in investment (which added to GDP) was also tariff-driven as businesses were building inventory ahead of price increases.

The PCE Price Index was unchanged at 3.6%. Excluding food and energy, the PCE Price Index was revised downward to 3.4%.