The Daily Tearsheet

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%.

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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.

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.”

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.”

Are you a mortgage originator with a bookkeeper, but no financial analyst? Are you doing without an annual budget because you don’t have the time / resources to develop one? Are you considering an acquisition, and want an in-depth analysis of the potential synergies and impact on the bottom line? Perhaps you have some projects that need to be done, but you can’t justify a full-time hire.

I am a consultant who has extensive experience in capital markets, secondary marketing, FP&A, budgeting, and servicing. If you think you might have a need, let’s set up a discovery call. 

Please reach out to brent@thedailytearsheet.com

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.

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Vital Statistics:

Stocks are lower after a stronger-than-expected jobs report. Bonds and MBS are getting crushed.

The economy added 256,000 jobs in December, which was well above the 156k Street expectation. The unemployment rate ticked down from 4.2% to 4.1%. Jobs were added in healthcare, social assistance and retail.

The labor force participation rate was unchanged at 62.5%, and the employment-population ratio rose to 60%. Average hourly earnings rose 0.3% on a monthly basis and 3.9% on a year-over-year basis.

Needless to say, this stronger-than-expected jobs report caused an immediate sell off in the bond market. The psychology of the bond market has been terrible for the past several months, so this isn’t a surprise. We did see stocks get rocked as well, as we have entered the “good news is bad news” phase of the market, where stocks would welcome lower rates, and that isn’t in the cards at the moment.

The Fed Funds futures moved more hawkish on the report, with the markets betting that we see only one rate cut this year (40%), and the second most likely scenario is zero (28%).

If you look at the internals of the jobs report, you see a familiar story – most of the job creation has been due to statistical adjustments. If you add up the headline numbers over the past year, you get a total of 2.2 million jobs created during the year. However, if you look at the actual number of paychecks being collected (i.e the “Employed” line of the jobs report), that number is actually just over 500k. So about 23% of the “jobs created” over the past year were real, and the rest weren’t. That explains why the job market looks strong according to the numbers, but doesn’t feel strong, especially if you ask a job-seeker.

Boston Fed President Susan Collins said she is less worried about the labor market. “My concerns about emerging labor-market fragility have decreased more recently, as the unemployment rate stabilized after rising notably in the first half of 2024,” Collins said in a speech to a commercial real estate trade group in Boston. “There is likely some room for additional wage gains that would help to raise the purchasing power and economic wellbeing of workers without fueling inflation,” she said.

Certainly the jobs report today supports this contention. This gives the Fed some leeway to wait until we have more clarity about what Trump intends to do on the issue of tariffs and fiscal policy. The economy has been supported by heavy fiscal stimulus, which will be pared back as well.

Are you a mortgage originator with a bookkeeper, but no financial analyst? Are you doing without an annual budget because you don’t have the time / resources to develop one? Are you considering an acquisition, and want an in-depth analysis of the potential synergies and impact on the bottom line? Perhaps you have some projects that need to be done, but you can’t justify a full-time hire.

I am a consultant who has extensive experience in capital markets, secondary marketing, FP&A, budgeting, and servicing. If you think you might have a need, let’s set up a discovery call. 

Please reach out to brent@thedailytearsheet.com

Vital Statistics:

Stocks are closed today in observance of a day of mourning for former President Jimmy Carter. Bonds will have an early close at 2:00.

We will have a slew of Fed speakers today

The minutes of the December FOMC meeting were released yesterday, and they provided a little clarity on the Fed’s thinking.

In their discussion of inflation developments, participants noted that although inflation had eased substantially from its peak in 2022, it remained somewhat elevated. Participants commented that the overall pace of disinflation had slowed over 2024 and that some recent monthly price readings had been higher than anticipated. Nevertheless, most remarked that disinflationary progress continued to be apparent across a broad range of core goods and services prices.

Notably, some participants observed that in the core goods and market-based core services categories, excluding housing, prices
were increasing at rates close to those seen during earlier periods of price stability. Many participants noted that the slowing in these components of inflation corroborated reports received from their
business contacts that firms were more reluctant to increase prices, as consumers appeared to be more price sensitive and were increasingly seeking discounts.

With respect to core services prices, a majority of participants remarked that increases in some components had exceeded expectations over recent months; many noted, however, that the increases were concentrated largely in non-market based price categories and that price movements in such categories typically have not provided reliable signals about resource pressures or the future trajectory of inflation. Most participants also remarked that increases in housing services prices remained somewhat elevated, though they continued to slow gradually, as the pace of rent increases for new tenants continued to moderate and would eventually be reflected further in housing services prices…

Several observed that the disinflationary process may have stalled
temporarily or noted the risk that it could. A couple of participants judged that positive sentiment in financial markets and momentum in economic activity could continue to put upward pressure on
inflation.

The takeaway is that Fed policy will largely be driven by shelter inflation. Consumers are becoming more price sensitive, and most other measures of inflation are back to normal. If you compare the pre-pandemic level of shelter inflation to its peak in early 2023, we have retraced about 70% of the spike.

The Fed is concerned that cutting rates would push the housing market higher, and that explains their desire to slow the pace of rate cuts. Note that monetary policy is still restrictive, and the Fed Funds rate probably has to move another 100 basis points lower to get to neutral territory.

On the issue of shelter inflation, homeowners insurance does not appear to be included in the CPI, so any increases there won’t affect the numbers. Homeowners insurance companies had been fleeing California and Florida already, and the wildfires in LA will be an impetus for more to leave, especially since CA regulators rejected their requests for rate increases.

On the issue of tariffs and immigration, it seemed like some of the participants included a factor for it while others did not. Immigration restrictions will have a push-pull effect on inflation: demand will decrease as population growth slows, however that could increase wage pressures in some sectors of the economy. Tariffs are not certain either, and could be offset by falling prices and currencies. This is especially prevalent in China which is in a deflationary spiral similar to Japan in the early 1990s.

US employers announced 38,792 job cuts in December, according to the Challenger and Gray job cut report. For the year, companies announced 761,358 cuts, and increase of 5.5% compared to 2023. “Companies underwent extraordinary change in 2024 due to rapid technological advancement and shifting economic conditions. Most employers are anticipating additional uncertainty with the upcoming administration, which is leading to slower hiring and more layoffs in the short term from various sectors,” said Andrew Challenger, workplace expert and Senior Vice President of Challenger, Gray & Christmas, Inc. 

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Vital Statistics:

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

The bond market is down again today, with UK Gilt yields up 12 basis points this morning. Adding to the pressure on bonds was a lousy auction yesterday, with the 10 year yield hitting the highest level since 2007.

Job openings increased to 8.1 million at the end of December, according to the Bureau of Labor Statistics. This was an increase of 259k from the upward-revised November reading. On the other hand, the quits rate declined to 1.9%, which is a sign of weakness in the labor market.

Given the current bearish psychology of the bond market, bond investors focused on the 8.1 million job openings and ignored the quits rate. The red line is the job openings rate, while the blue line is the quits rate. The job openings rate is higher than pre-pandemic levels, while the quits rate is below pre-pandemic levels.

More indications that the labor market is cooling: The economy added 122,000 jobs last month, according to the ADP Employment Report. This was below expectations, and is less than Street expectations for Friday’s jobs report. “The labor market downshifted to a more modest pace of growth in the final month of 2024, with a slowdown in both hiring and pay gains,” said Nela Richardson, chief economist, ADP. “Health care stood out in the second half of the year, creating more jobs than any other sector.” Indeed, the bulk of the gains came in health care / education and leisure / hospitality. Manufacturing jobs fell.

Pay gains for job stayers fell to 4.6%, the lowest since July of 2021.

Mortgage applications fell 3.7% last week as purchases fell 7% and refis fell 2%. “Applications decreased last week as rising mortgage rates continued to discourage buyers from entering the market and put a damper on purchase activity. The 30-year fixed rate increased for the fourth consecutive week, reaching 6.99 percent – the highest rate since July 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications declined for both conventional and government loans and dropped to the slowest weekly pace since February 2024. Refinance applications increased despite higher rates, but the increase was compared to recent low levels and was driven entirely by an increase in VA refinances, which continue to show weekly swings.”

Adding fuel to the bonfire in the bond market was the ISM Services report, which showed the sector expanding again. “The Services PMI^® in December was boosted primarily by strength in the Business Activity and Supplier Deliveries indexes. Many industries noted that end-of-year and seasonal factors were helping drive business activity or impact inventory management. Some of the increased business activity seems to have been driven by preparation for demand in the new year, or risk management for impacts from ports strikes and potential tariffs. There was general optimism expressed across many industries, but tariff concerns elicited the most panelist comments.”

The prices index increased to 64.4%,which was the highest reading since January of 2024. There might have been some seasonal / end-of-year effects going on, so this is something to watch.

Vital Statistics:

Stocks are higher this morning as the chip stocks continue to lead. Bonds and MBS are down.

Fed Governor Lisa Cook said the central bank can proceed more cautiously with further rate cuts yesterday.  “The labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time,” Cook said in remarks for delivery at the University of Michigan Law School. “Thus, I think we can afford to proceed more cautiously with further cuts.”

“Over time, I still think it will likely be appropriate to move the policy rate toward a more neutral stance,” Cook said. However the cuts made to date “have notably reduced the restrictiveness of monetary policy. All along, I envisioned moving more quickly in the early stages of our easing campaign and then easing more gradually as the policy rate came closer to neutral.”

The bond market reacted negatively to this, although nothing she said is really all that new. The Treasury market has $119 billion in new supply coming to market this week, so that is another reason for bonds to be heavy.

The apartment vacancy rate increased to 6.1% by the end of 2024, which is 50 basis points higher than 2023 and the highest level since 2011. It looks like more than 300,000 new units hit the market for the year. Effective rent rose 0.1% for the year.

With the new administration expected to slow immigration, we should see further downward pressure on rents. Multifam units under construction are still elevated, although they are not as high as last year. Multi-fam starts have begun to wane.

A decline in asking rents should help ease shelter inflation, which is the final hurdle in the Fed’s march to return to 2% inflation.

The US economy wrapped up 2024 with higher growth, according to the S&P PMI. Expectations of a more business-friendly regulatory environment are helping boost sentiment. There is a bifurcation between the services economy (which is doing well) and manufacturing with is struggling. S&P caveats that the overall economy improved in the second half of 2024 partially on expectations of future rate cuts. As markets trim expectations for future cuts, we could see the financial services sector take a hit.

The prices component of the PMI remained subdued, however we are seeing rising import good prices, particularly on raw materials. This is surprising given the US dollar strength into the latter half of 2024.

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Vital Statistics:

Stocks are higher this morning as we enter an important week for data. Bonds and MBS are up small.

The week ahead will be dominated by the jobs report on Friday, although we will also get the FOMC minutes on Wednesday afternoon. We also will have a 10 year and 30 year Treasury auction on Tuesday.

The minutes will be interesting since the Fed Funds futures are now assigning a 45% chance that we get only 1 (or even zero) cuts this year. The markets are assigning a 13% chance for no cuts in 2025 and a 32% chance of only 1.

The dot plot from the December meeting had a 5% chance of zero cuts in 2025 and a 16% chance of only 1 cut. This change in market sentiment for rate cuts is a big reason why the 10 year can’t catch a break.

On Friday, Richmond Fed President Thomas Barkin said that he though the risks to inflation were higher to the upside than the downside and that the Fed should stay restrictive for longer. “I think there is more upside risk than downside risk” to inflation, given the economy’s continued strength and the possibility of renewed wage and other price pressures, Barkin told the Maryland Bankers Association in Baltimore. “I put myself in the camp of wanting to stay restrictive for longer as opposed to the other school, which would be ‘we’re done, so why not take rates down to neutral.'”

The minutes should be interesting, because I wasn’t aware anyone was saying that the battle against inflation was done. The bottom line is that Fed policy is still restrictive, and r star (or the neutral rate) is about 100 basis points below current levels.

The Fed has hinted that it is happy with the current unemployment rate, and doesn’t want to see the labor market deteriorate further. If we see an uptick in unemployment, that should be bullish for bonds and we should see the Fed Funds futures start to price in 2 more cuts this year.

The manufacturing economy improved in December, according to the ISM Manufacturing Survey. “U.S. manufacturing activity contracted again in December, but at a slower rate compared to November. Demand showed signs of improving, while output stabilized and inputs stayed accommodative … Demand improved, production execution met November’s performance (and companies’ plans), de-staffing continued (but should end soon), and price growth was marginal.”

Note that while price growth was indeed marginal, it increased from November. Meanwhile, employment deteriorated.

I am accepting ads for this blog if you would like to make an announcement, highlight something your company is offering or want more visibility. I am running a special for new clients as well. I offer white-label services which give you the ability to use this content for your own daily emails. The blog has thousands of subscribers / followers and an open rate around 50%. Please feel free to reach out to brent@thedailytearsheet.com if you would like to discuss this further