The Daily Tearsheet

Morning Report: Tech stocks getting crushed this morning

Vital Statistics:

Stocks are lower this morning on news that a Chinese AI upstart Deepseek could upend the AI market. Bonds and MBS are up on the risk-off trade.

The news on Deepseek is crushing the Nasdaq 100 index this morning, particularly the AI darlings like Nvidia. The Nasdaq futures are down 4% in premarket trading. The Chinese AI startup is supposedly outperforming other AI offerings, and which is rattling tech stocks, especially the ones that have led the market up over the past year or two. The bond market is benefiting from the panic, with the 10 year pushing towards 4.5%.

“Deepseek R1 is one of the most amazing and impressive breakthroughs I’ve ever seen,” said Marc Andreessen, the Silicon Valley venture capitalist who has been advising President Trump, in an X post on Friday.

The week ahead will be dominated by earnings (especially Microsoft and Meta), along with the January FOMC meeting and the PCE Price Index on Friday. We will also get home prices and new home sales.

The Fed Funds futures see no changes to interest rates at this week’s FOMC meeting. They have begun to lean towards more cuts this year, with the probability of two or more cuts at 74%. This number was closer to 50% last week.

The equity risk premium (or the incremental return equity investors require to invest in stocks) is currently about zero, which means that stocks are wildly overvalued compared to bonds. The last time it was this low was in early 2021, as the tech bubble was unwinding.

If we see a an unwinding of this phenomenon (and this morning may be step 1), bonds might be in vogue again. Good news for mortgage originators, that is for sure. Not so much for servicers, though.

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Morning Report: Inflationary expectations soar.

Vital Statistics:

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

Donald Trump demanded that the Fed cut rates: “I’ll demand that interest rates drop immediately,” Trump said. “And likewise, they should be dropping all over the world. Interest rates should follow us all over.” Don’t forget that we saw this movie before in his first term in 2019, before the Fed started cutting rates as GDP was falling.

Monetary policy is still quite tight, with the Fed Funds rate at least 100 basis points above the neutral rate. It is looking like the pause in disinflation last year might have been a blip, and the path is back downward.

Ultimately the main problem with inflation is shelter, which is easing as a glut of apartments hit the market. If the Fed cuts rates further, will we see an acceleration in home price appreciation? I don’t see it, given that we are bumping up against affordability constraints.

Existing home sales rose 2.2% in December, according to the National Association of Realtors. This was the strongest pace since February of 2024. The median home price rose 6% YOY to $404,400. This was primarily due to outperformance at the top end. “Home sales in the final months of the year showed solid recovery despite elevated mortgage rates,” said NAR Chief Economist Lawrence Yun. “Home sales during the winter are typically softer than the spring and summer, but momentum is rising with sales climbing year-over-year for three straight months. Consumers clearly understand the long-term benefits of homeownership. Job and wage gains, along with increased inventory, are positively impacting the market.”

The first time homebuyer accounted for 31% of all home sales, up from 30% in November. FWIW, the Spring selling season is just around the corner and this report is encouraging.

Consumer sentiment declined in January, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment fell for the first time in six months, edging down 4% from December. While assessments of personal finances inched up for the fifth consecutive month, all other index components pulled back. Indeed, sentiment declines were broad based and seen across incomes, wealth, and age groups. Buying conditions for durables softened but remained about 30% better than six months ago amid persistent views that purchasing now would avoid future price increases. Despite reporting stronger incomes this month, concerns about unemployment rose; about 47% of consumers expect unemployment to rise in the year ahead, the highest since the pandemic recession. January’s data closed on Inauguration Day, and consumers of all political leanings will continue to refine their views as Trump’s policies are clarified and implemented.”

Unfortunately, inflationary expectations increased, with the short term (one year) rising from 2.8% to 3.3%. Longer-run inflationary expectations also increased from 3% to 3.2%.

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Morning Report: Leading Indicators are no longer signaling a recession

Vital Statistics:

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

The Index of Leading Economic Indicators declined 0.1% in December, according to the Conference Board. “The Index fell slightly in December failing to sustain November’s increase,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Low consumer confidence about future business conditions, still relatively weak manufacturing orders, an increase in initial claims for unemployment, and a decline in building permits contributed to the decline. Still, half of the 10 components of the index contributed positively in December. Moreover, the LEI’s six-month and twelve-month growth rates were less negative, signaling fewer headwinds to US economic activity ahead. Nonetheless, we expect growth momentum to remain strong to start the year and US real GDP to expand by 2.3% in 2025.”

The big negative drivers were weak new orders from the ISM report, the slope of the yield curve, and negative consumer confidence. The big positive components were financial: easing credit conditions and the performance of the stock market.

D.R. Horton reported first quarter earnings. Revenues were down YOY as deliveries fell. Gross margins declined as the company is battling affordablity issues by offering mortgage buy-downs. “Although the level of new and existing home inventories has increased from historically low levels, the supply of homes at affordable price points is generally still limited, and demographics supporting housing demand remain favorable. Despite continued affordability challenges and competitive market conditions, incentives such as mortgage rate buydowns have helped to address affordability and spur demand. Additionally, given our focus on affordable product offerings, we have continued to start and sell more of our homes with smaller floor plans to meet homebuyer demand.”

You would think that with such a dearth of starter homes, D.R. Horton would be plowing cash back into the business. It is not. Over the past 12 months it has used all of its operating cash flow buying back stock and paying dividends, despite the fact that the operating business is generating an ROE approaching 20%. As a general rule, if a company expects to earn higher than its cost of capital on the underlying business, it expands the business. If it doesn’t, it should return that capital to shareholders. It is surprising then that DHI is eschewing profitable business opportunities and instead buying back its own stock.

Donald Trump has ordered “emergency relief” on housing affordability, and plans to attack regulatory costs: “Hardworking families today are overwhelmed by the cost of fuel, food, housing, automobiles, medical care, utilities, and insurance. Moreover, many Americans are unable to purchase homes due to historically high prices, in part due to regulatory requirements that alone account for 25 percent of the cost of constructing a new home according to recent analysis.”

I am not sure how much of that 25% is addressable at the Federal level and how much is local building / environmental codes. That said, it is encouraging that the government is taking a look at the issue.

Morning Report: Rental inflation cools

Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are flat.

Mortgage applications rose 0.1% last week as purchases rose 0.6% and refis fell 2.9%. “Mortgage application volume was little changed last week, but there was a small increase in conventional purchase volume, which brought the level of total purchase volume up almost 2 percent above last year at this time,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Mortgage rates remained near 7 percent, a key psychological level, which likely continues to slow the pace of activity for both refinances and purchases. Incoming economic data are likely to keep the Federal Reserve on hold for now, while uncertainties about economic policy are likely to keep longer-term rates, including mortgage rates, steady at these levels.”

Rent growth has seen the slowest increase in years, according to a study by Rentometer. “The rental market is undergoing a noticeable shift, as both apartment rents and the single-family rental segment – which houses 14 million Americans and has outperformed apartment rents over the past couple of years – experience a marked slowdown,” the report notes. The apartment market “has suffered due to a glut of new units coming to market,” and that those dynamics have also begun to impact single-family rents. The 6% vacancy rates have not been seen since the first quarter of 2018, according to the report.

While this is not good news for landlords (and investors in DSCR loans), it is good news for shelter inflation which has been the last mile in the Fed’s fight against inflation.

The CPI rent index was steady around 3.5% pre-pandemic. It peaked at 8.2% and has decreased back to 4.6%. We are basically 3/4 of the way back to normalcy in rental inflation. The markets might be a little too hawkish on the expected Fed Funds rate.

Speaking of a glut of new units, here are 5+ units under construction:

So the glut is going to get worse before it gets better.

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Morning Report: A slow week of data ahead

Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up. We will get earnings from market darling Netflix today.

The week ahead is extremely data-light, with the index of leading economic indicators and existing home sales the only really interesting data points. We are in the quiet period ahead of next week’s FOMC meeting, so we won’t have any Fed-speak. Earnings season is in full swing, so that will be the driver stocks going forward.

Here is a list of the folks Donald Trump has named for his economic policy team. Kevin Hassett of the AEI will be the leader and the focus will be on decreasing burdensome regulation. Jeff Wrase will focus on financial regulation and banking.

Trump signed a slew of executive orders yesterday, but didn’t impose tariffs quite yet. The focus was on the border, DEI, and energy. Supposedly a 25% tariff on Canadian and Mexican goods kicks in on February 1 and he is still considering universal tariffs.

The Fed Funds futures are predicting no changes to the Fed Funds rate next week. The December FF futures still see a toss up between 0-1 cuts and 2 or more cuts.

UBS is warning that interest rates might not fall as fast as hoped this year if tariffs stoke a resurgence of inflation. “Something that I’ve been saying for a while, inflation is much more sticky than we have been saying,” he told CNBC’s Andrew Ross Sorkin at the World Economic Forum in Davos, Switzerland. “The [truth] of the matter is that we need to see also how tariffs will play a role in inflation.”

“Tariffs will probably not really help inflation to come down. And therefore I don’t see rates coming down as fast as people believe,” he said.

Morning Report: Housing starts rebound

Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up.

Housing starts rose 15.8% MOM to a seasonally adjusted annual rate of 1.499 million. This was 4.3% below December 2023’s rate. Building permits fell 0.7% MOM to a seasonally adjusted annual rate of 1.483 million units. Both numbers were well above Street expectations.

Homebuilder sentiment improved modestly to kick off the new year, according to the NAHB. “NAHB is forecasting a slight gain for single-family housing starts in 2025, as the market faces offsetting upside and downside risks from an improving regulatory outlook and ongoing elevated interest rates,” said NAHB Chief Economist Robert Dietz. “And while ongoing, but slower easing from the Federal Reserve should help financing for private builders currently squeezed out of some local markets, builders report cancellations are climbing as a direct result of mortgage rates rising back up near 7%.”

Despite the affordability issues, the use of incentives and price cuts has remained steady since last summer. Sentiment remains strongest in the Northeast and Midwest, while the South and (especially) the West are struggling.

Fed Governor Chris Waller said that the Fed Funds futures might be too hawkish if inflation comes in as expected this year. “As long as the data comes in good on inflation or continues on that path, then I can certainly see rate cuts happening sooner than maybe the markets are pricing in,” Waller said during a “Squawk on the Street” interview with Sara Eisen.

Asked how many that could entail, he responded, “That’s all going to be driven by the data. I mean, if we make a lot of progress, you could do more,” which he said could mean three or four, assuming quarter percentage point increments.

“If the data doesn’t cooperate, then you’re going to be back to two and going maybe even one, if we just get a lot of sticky inflation,” he said.

Right now, the “maybe even one” scenario is the baseline according to the Fed Funds futures.

Interesting quote about how homebuyers are adjusting to the new normal: “My average first-time homebuyer now says $3,500 is comfortable, compared to the $2,000 to $2,500 range previously. Those looking for a family house now say $6,500 to $7,500; previously, $4,500 was the primary target. I’m also seeing more people more comfortable with $8,000 to $10,000 mortgage payments than ever. Honestly, for the first 20 years of my career, I don’t believe I ever had a mortgage payment offered over $10,000, and now I have a few of those each quarter.”

Industrial production rebounded smartly in December, according to the Federal Reserve. For the full year, industrial production rose 0.5%. Capacity utilization rose from 77% to 77.6%.

Morning Report: Retail Sales rise

Vital Statistics:

Stocks are flat as earnings continue to come in. Bonds and MBS are flat.

Retail Sales rose 0.4% in December, according to the Census Bureau. This was a decline from November, and was a touch below expectations. On a year-over-year basis retail sales rose 3.9%. Since this number isn’t adjusted for inflation, retail sales rose modestly.

If you strip out gasoline and vehicles, retail sales rose 0.3%. For the full year 2024, retail sales rose 3%, which means retail sales on an inflation-adjusted basis fell for the year.

Yesterday’s CPI report was reflected in the Fed Funds futures, which moved a bit more dovish. The December 2025 futures now see a 19% chance of no rate cuts this year, a 36% chance of 1, and 29% chance of 2.

Initial Jobless Claims increased to 217k last week.

JP Morgan reported better than expected earnings yesterday. Book value per share rose 11%, where EPS rose 58%. Jamie Dimon said: “The U.S. economy has been resilient. Unemployment remains relatively low, and consumer spending stayed healthy, including during the holiday season. Businesses are more optimistic about the economy, and they are encouraged by expectations for a more pro growth agenda and improved collaboration between government and
business. However, two significant risks remain. Ongoing and future spending requirements will likely be inflationary, and therefore, inflation may persist for some time. Additionally, geopolitical conditions remain the most dangerous and complicated since World War II. As always, we hope for the best but prepare the Firm for a wide range of scenarios.”

Mortgage origination increased smartly compared to last year, rising to $12.1B compared to $7.2 billion in the fourth quarter of 2023.

Morning Report: CPI inflation comes in lower than expected

Vital Statistics:

Stocks are higher as we kick off earnings season. Bonds and MBS are up small.

The consumer price index rose 0.4% MOM and 3.3% YOY, which was a touch above expectations. (the Street was looking for a 0.3% MOM rise). If you strip out food and energy, prices rose 0.2% MOM and 3.2% YOY, which was better than expectations. Gasoline prices were a big driver of the headline number, and shelter inflation remained at 0.3% MOM

The bond market reacted positively to the report, with the 10 year yield initially pushing down towards 4.72%.

Mortgage applications rose 33% last week as purchases rose 27% and refis increased 44%. The previous week was the New Year holiday, so that accounts for the big increase.

“Bond yields in the U.S. and abroad continued to move higher in response to concerns over a sticky inflation outlook and still too-high budget deficits, which pushed mortgage rates higher for the fifth consecutive week. The 30-year fixed rate is now at 7.09 percent – its highest level since May 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “This time of the year is a particularly volatile time for application volumes, so it can be more helpful to focus on the level rather than the percent change. Purchase applications were 2 percent lower, and refinances were 22 percent higher compared to a year ago. Total applications were up by 33.3 percent, the highest level in a month, as both purchase and refinance applications saw large percentage increases over the week.”

Morning Report: PPI comes in as expected

Vital Statistics:

Stocks are higher after the PPI came in lower than expected. Bonds and MBS are flat.

The producer price index (a measure of wholesale inflation) rose 0.2% MOM in December, which was a decline from November, and below Street expectations. If you strip out food and energy, the index was flat and rose 3.5% YOY. The monthly number was again below expectations. Energy was the big driver for the increase in headline PPI.

This number is a bit player for the Fed (the CPI tomorrow will be a bigger deal) but it is an encouraging data point.

Small Business Optimism hit a 6 year high in December, according to the NFIB. A net 52% of respondents expect the economy to improve, an increase of 16 points from the November survey.

“Optimism on Main Street continues to grow with the improved economic outlook following the election. Small business owners feel more certain and hopeful about the economic agenda of the new administration. Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year.”

Lock volume decreased 17% last month, according to MCT. “The Fed is expected to hold rates steady for longer as we continue to see a strong jobs market coupled with lowering inflation,” stated Andrew Rhodes, Senior Director and Head of Trading at MCT. “As we move into 2025, nonfarm payroll and the Consumer Price Index (CPI) will continue to be critical data points providing insight into any potential rate cuts. However, the more immediate focus is on the incoming administration policy changes and their effect on the market.”

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: Earnings season kicks off this week

Vital Statistics:

Stocks are lower this morning as markets continue to digest the jobs report. Bonds and MBS are flat.

The week ahead will be relatively data-light, however we will get the consumer price index on Wednesday and housing starts on Friday. Earnings season also kicks off on Wednesday with a bunch of the big banks reporting. Given that the Fed has pared back its planned rate cuts, earnings will take on a much bigger role in supporting the stock market.

After Friday’s jobs report, the Fed Funds futures made another hawkish move, handicapping a 29% chance of no rate cuts this year, and another 40% change of only 1.

Damage estimates for the Palisades fires in CA are coming in around $150 – $250 billion. This would rank this as one of the most expensive natural disasters in the US, rivaling Hurricane Katrina. This destruction of wealth will almost certainly have a negative effect on the US economy, and it could create some big problems for the P&C sector. In addition, we should expect to see CA municipal bonds take a hit. The CA safety-net insurance fund doesn’t have nearly the cash to absorb the potential losses.

Servicers will have risk as well, especially VA servicers who have the no-bid risk.

Consumer confidence slipped in January, according to the University of Michigan Consumer Sentiment Survey. Respondents’ personal finances improved, while the outlook darkened.

Notably, inflation expectations jumped from 2.8% to 3.3% in the year ahead. This is the highest reading since May 2024, and is well above the pre-pandemic level of 2.3% – 3.0%. Longer-run inflationary expectations increased as well.

Between the strong jobs report and rising expectations, bonds got clobbered on Friday.

About22% of the jobs posted online are fake, according to HR firm Greenhouse. The reasons for fake job listings vary, but that is a big number. If this is the case, that implies that the latest JOLTs job openings report was really closer to 6.3 million than 8.1 million.

Couple that with the internals of Friday’s jobs report, which show that the number of people employed increased by about 500k last year, as opposed to the 2.2 million “jobs created” via statistical adjustments, it appears the job market may not be as strong as advertised.