Stocks are flattish this morning as oil continues to climb. Bonds and MBS are flat.

The economy grew modestly over the past 6 weeks according to the Fed’s Beige Book. Consumer spending grew moderately despite higher gasoline prices. The labor market continued its low hire / low fire state, while price inflation was more or less steady. Residential construction declined, however data center building offset it. As an aside, I wonder how much data center construction is drawing away skilled labor from resi construction.

Given that backdrop, it is surprising to see the Atlanta Fed’s GDP Now model predicting Q3 GDP growth at a torrid 4.8%. Note particularly the chasm between the Atlanta Fed model and the Street consensus, which sees something like 2.4%. The ISM reports are doing a lot of heavy lifting in the model.

Private residential construction spending continues to be under pressure according to the NAHB and the latest construction spending report. It fell 1.3% MOM and 7.3% YOY. Single family construction accounted for all of the decline. Blame high mortgage rates and a glut of inventory with the builders. All of the publicly-traded homebuilders reported lower gross margins, which indicates price cuts. Most builders are allocating spare capital to buying back stock instead of expanding and lot purchases.

Despite the claims of the housing advocates, there is not a shortage of homes. The builders are sitting on inventory levels that rival the glut before the 2008 housing crash:

They aren’t building more until that inventory gets worked off. Multifamily tells a similar story. Construction of 5+ unit structures during the low-interest rate post COVID years soared, especially in places like Phoenix and Austin. Average asking rents have been declining for 4 years as the new inventory gets absorbed.

New York Fed President John Williams said that rising bond yields are being driven by strong economic growth, not market dysfunction. “What’s driving it, in large part, is ... really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general,” he said. “So, I think it’s not really about financial conditions affecting the economy. It’s more about the economy affecting financial conditions.”

I would add that the increase in bond yields is global and not limited to the US. Japan has seen nearly a 100 basis point rise in yields year-to-date, with Europe seeing similar increases to the US.

We wouldn’t say whether he supported a hike at the September meeting. “I think that we have to wait and see. There’s no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that.”

“The [inflation] data recently have been encouraging towards that, but again we can’t just look a month or two. We’ve got to get a full picture and and look at all the ... different pieces of information we have,” he added.

The September Fed Funds futures are still leaning towards a hike, with a 62% probability.

Announced job cuts rose 38% MOM but fell 38% YOY, according to the Challenger Gray and Christmas Job Cut report. This is the lowest August since 2022, and is consistent with the low hire / low fire labor market.

“This is the quietest August since 2022, but is generally on average for the month since the mid-2010s. What we’d like to see with low layoffs is an increase in hiring activity. While companies are making plans to hire more workers than last year, according to our numbers, it doesn’t appear those positions are being filled quickly,” said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.

Year-to-date, technology leads with the most announced job cuts, followed by transportation. While it is tempting to name AI as the reason for the cuts, AI is the fourth-most cited reason. Restructuring is the top one, followed by economic conditions and closings. Note that even if AI is the reason, companies will be reluctant to say that.

Surprisingly, the tech sector led in hiring, so there appears to be some churn going on as software is struggling while AI is growing.

The private sector added 38,000 jobs in August according to the ADP Employment Report. This was below the 48,000 street estimate and the 55,000 expected for Friday’s jobs report. Education and health services added 45,000 jobs, while construction increased 12,000 and leisure / hospitality rose 16,000. Manufacturing fell, as did professional and business services.

Pay increases moderated to 3.2% from 3.3% the prior month. Job stayers were steady at 3% while job changers fell from 4.8% to 4.7%.

“Pay can tell us a lot about today’s choppy hiring. To understand hiring patterns, you have to look deeply into where pay growth is accelerating, where it’s slowing, and for whom. Once-predictable wage growth has been overtaken by the complexities of demographic change, persistent inflation, and AI’s effects on jobs.”

The ADP report is consistent with the Fed’s assessment of the labor economy: slow hire / slow fire.

The manufacturing economy decelerated in August according to the ISM Manufacturing Report. New orders and production readings declined relative to July, but remained solidly in expansion territory. Prices were flat compared to July, indicating inflation remained unchanged. “In August, U.S. manufacturing activity remained in expansion territory, though it has lost ground in a number of key measures — namely, the New Orders, Backlog and Imports indexes. Of the five subindexes that make up the PMI^®, the only one that grew faster than last month was Supplier Deliveries (up 0.4 percentage point), indicating a continuing slowdown of the supply chain.

“In August, 42 percent of the comments were positive and 58 percent negative, with a 1-to-1.4 ratio of positive to negative sentiment. Pricing volatility was mentioned in 57 percent of negative comments, the Iran war 30 percent, increasing lead times 46 percent and tariffs 29 percent. (Most comments mentioned multiple factors.)

Job openings fell to 7.27 million in July, which was below expectations. Health care and social assistance saw the biggest increase in openings while professional and business services saw the biggest decline. The quits rate fell from 2.0% to 1.9%. A low quits rate indicates that workers are concerned about the economy and reluctant to switch jobs.

Mortgage applications rose 0.8% last week despite mortgage rates hitting the highest level in a month. Purchase applications rose 2% while refis fell 1%. “Mortgage rates reached their highest levels in four weeks as investors’ concerns about inflation and growing deficits push yields higher across the globe,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Refinance volume dropped in response, but purchase volume increased modestly over the week and was slightly below last year’s level. In many local markets, potential buyers have plenty of homes to choose, and this is likely supporting transaction volume.”

Stocks are lower this morning as oil prices and bond yields continue to rise. So far MBS spreads are tightening to offset the move up in the 10 year.

The situation in the Strait of Hormuz continues to pressure bond yields. Fire was exchanged while one ship was hit by an unknown projectile in the Strait. Iran is urging the US to return to the June deal. Shipping traffic in the Strait of Hormuz is back down to something like 5 ships a day - a far cry from the 100 we used to see before hostilities.

The sell-off in bonds is not limited to the US - it is global. The yield on the Japanese Government Bond is 3%, and it is up almost 90 basis points this year. The 10 year is up 60. The German Bund is up close to 50, and the UK Gilt is up 60. So this sell-off is an overall rejection of sovereign debt. China’s long-term debt is holding steady, which is to be expected since they are dealing with the aftermath of a real estate bubble.

MBS spreads and corporate bond spreads are narrowing, which means that yields are rising on these products as well, just not as much as the 10-year. This is a good sign for the economy overall - it means that it is handling higher rates well.

Meanwhile, Trump is meeting with the CEOs of the big refiners to see if there is a way to expand capacity and push down gasoline prices. Note West Coast refiners are dealing with onerous state regulations in CA and WA which is pushing them to leave these markets. The deal with Venezuela to increase production could help, but ultimately crack spreads march to their own drummer. Venezuelan production has been depressed for years, and the hope is that the US can help it get back to normalcy.

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As anyone who hedges their pipeline knows, volatility is the enemy of margin. Big moves in the markets can depress loan bids and make hedges underperform. Swaptions provide a way to buy some insurance against that risk. If you are hedging your MSR portfolio or Non-QM loans for sale, SOFR swaptions may be a good fit.

Exchange traded swaptions also have the benefit of no initial margin, no counterparty risk, and better execution than a over-the-counter (OTC) option. In an OTC transaction, you contact a bank who will “take the other side” of your trade. So they can sell you an expensive option and then buy it back cheaply when you want to exit since they know your position (or “which way you are”). On an exchange, you will get better pricing because the counterparties are anonymous and have no knowledge about your position.

Contact John Douglas at www.erisfutures.com to learn more.

The CME has an article discussing exchange-traded SOFR swaptions, which are options on a swap. It is a good backgrounder on how they work, what the advantages of them are, and talks about how you don’t need to be a huge bulge bracket bank anymore to take advantage of them. Lower margin requirements are also helpful for mortgage banks who need to maintain maximum liquidity.

The article is an excellent backgrounder for those who want to learn more about how these instruments are traded. Anyone thinking about hedging non-QM and MSR positions should take a deep dive and understand the possibilities.

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Kevin Warsh’s comments at Jackson Hole have bumped up the odds for a rate hike at the 15-16 September meeting. The odds currently stand at 67% for a 25 basis point hike and 33% for no change. We will get this Friday’s jobs report and next week’s CPI report before the meeting. If Friday’s jobs report shows a rebound after July’s disappointing 23,000 drop (or that number is revised upward), expect the futures to price in a bigger chance of a hike.

Foreclosures starts picked up in July to 39,906 which is up 10% on a year-over-year basis. “The increase in foreclosure starts and completed foreclosures compared to last year shows that financial pressures remain a factor for some homeowners,” said Rob Barber, CEO at ATTOM. “However, the broader context is important. Foreclosure activity remains relatively low by historical standards. While annual increases have become more common, current volumes indicate that the market remains relatively resilient overall.”

Texas, Florida, and California had the biggest increase in starts.

Interesting chart: Stocks have outperformed bonds by the most since the Kennedy Administration. Either stocks are wildly overvalued or bonds are wildly undervalued. I’ll let you guess which one is the case.

Stocks are lower this morning as oil rises. Bonds and MBS are down.

Iran and the US exchanged strikes over the weekend, with Trump threatening Kharg Island which is Iran’s primary export hub. Hitting Kharg Island would be a major escalation and would undoubtedly move oil prices much higher.

The week ahead will be dominated by the jobs report on Friday. Aside from jobs, we will get ISM data and construction spending. Earnings season is largely over, and profits were strong, helped out by tariff refunds.

Kevin Warsh spoke at Jackson Hole on Friday. Here are his prepared remarks.

On the subject of decreasing communication from the Fed:

Transparency in communications about future policy decisions is not a virtue unto itself. Communications must be in service to the Fed’s paramount responsibility: getting monetary policy right.⁵

Forward guidance as a regular practice was adopted by my colleagues and me during the Global Financial Crisis.⁶ It was essential at the time, and we introduced it with much fanfare. But, as with other legacies of crises past, I believe that the practice has overstayed its welcome.

The Fed should be humble and never naïve. The Fed plays an essential role in the economy and the markets. And our tools are powerful. We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.

The economic literature has long described the distorting effects: a hall-of-mirrors problem.⁸ If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments . . . more likely to be caught unprepared for a turn of events . . . and more likely to commit errors in policymaking.⁹

The key point is that providing guidance can have the opposite of the intended effect. The Fed talks, markets move and the Fed reacts to the market move. Forward guidance was something that made sense in the aftermath of the burst residential real estate bubble when deflation was a clear risk. That is no longer the case, and the Fed is returning to normalcy.

On the economy:

For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened. One indicator of strength is how well an economy holds up to shocks. On that score, both Main Street and Wall Street have been remarkably resilient.

Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.

Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices. To try to gauge underlying inflation, I find it instructive to disaggregate the 199 individual components of the PCE price measure. Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. This is well below the post-pandemic highs of about 77 percent, but it remains well above the level of 32 percent in the two decades that preceded the pandemic.

Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep.

The markets interpreted his comments as hawkish and bumped up their chance of a rate hike at the September meeting. The comment that policy is not restrictive currently is sending signals that the Fed’s estimate of r-star (the neutral interest rate) is too low. You cannot estimate r-star directly, but the March projections have it at 3.1%.

If policy is not restrictive at a range of 3.5% - 3.75%, it implies we are at r-star.

Consumer sentiment remained depressed in August according to the University of Michigan Consumer Sentiment Survey. Sentiment declined 6% MOM and is down 11% on a YOY basis. Sentiment fell across groups. Year-ahead inflation expectations decreased from 4.2% to 4.0% and longer-run expectations were unchanged at 3.3%.

Stocks are flattish this morning as we await Kevin Warsh’s speech at Jackson Hole. Bonds and MBS are down.

Kevin Warsh is expected to speak today at Jackson Hole at 10:00 am EST. Given the Fed’s new direction of less communication it is hard to predict what he will say. Obviously the market is looking for direction regarding the level of interest rates but Warsh is probably going to play things close to the vest and speak in generalities: inflation is too high but we think it is going to come back down, we are prepared to raise rates if necessary, the overall economy is strong, the labor market is robust and monetary policy is in a good place while we wait and see how things unfold. No, I am not going to talk about Treasury’s repurchase program and long term bond yields which are set by the market.

Boston Fed President Susan Collins said that she is open to hiking rates if inflation doesn’t move lower: “I am open to supporting an increase if I see conditions as not providing that evidence of continued disinflation that I’m looking for,” Boston Fed President Susan Collins said in an interview on the sidelines of the Kansas City Fed’s annual symposium in Wyoming.

She was also asked about Treasury’s buyback program and declined to comment.

Separately, Cleveland Fed President Beth Hammack said now is the time to act on inflation: “I don’t want to prejudge anything. But I believe now is the time to act,” she said in a live CNBC interview from the Fed’s annual symposium in Jackson Hole, Wyoming. “I believe that we’ve been in an inflationary situation for more than five years. It’s been running well above our target. I don’t see any restriction in policy when I look at financial conditions and when I talk to market participants.”

“The longer inflation stays above our objective, the harder it will be for us to bring it back down, and the more pain that individuals and businesses are going to be experiencing,” she said. “To me, the real problem with us missing on our inflation objective for so long is the risk that an inflationary mindset starts to set in with the public.”

The “I don’t see any restriction in policy” means she thinks policy is neutral, and the natural non-inflationary rate of interest (r-star) is more or less in the mid-to-high 3% range, not 3% which is sort of where the consensus is.

The national median apartment rent rose 0.1% in August, however it is still down 0.8% on a year-over-year basis. The national median rent is $1,390 per month and has experienced annual declines for the past 3 years:

Given that home prices are rising modestly and apartment rental growth is negative shelter should be a drag on inflation, not a support for it. Something seems odd in the way the government is calculating owner equivalent rent.

The multifamily vacancy rate ticked down to 7.1% and list-to-lease times are 32 days. San Francisco and San Jose are seeing big increases in rents (think AI boom) while the Sun Belt is seeing declines.

New listings hit a 4-month high, according to Redfin, giving buyers more negotiating power. “Buyers have an opportunity to get a deal done before the market potentially picks back up after Labor Day,” said Chen Zhao, Redfin’s head of economics research. “House hunters should consider homes that have been listed for several weeks; sellers of those homes may be willing to accept an offer under asking price, provide concessions like a mortgage-rate buydown or make repairs based on an inspection. Sellers should resist the urge to price based on what a neighbor got a year or two ago: Pricing a home correctly from the start can be the difference between attracting a serious buyer and lingering on the market.”

Stocks are higher this morning after good numbers out of Nvidia. Bonds and MBS are down small.

The Fed’s Jackson Hole Symposium begins today with Kevin Warsh slated to speak tomorrow. These meetings tend to have a lot of press questions which will be interesting given Warsh’s preference for cutting down on the communication. Treasury Secretary Scott Bessent’s version of Operation Twist (where Treasury is buying back longer-dated bonds to push down long-term rates) will almost certainly be asked and it is a delicate question for Warsh. Generally speaking the Fed and Treasury stay in their respective lanes, where Treasury doesn’t comment on the Fed Funds rate and the Fed doesn’t comment on the US dollar.

Bessent is not only fighting the US’s large debt burden, he is fighting a general bear market in global sovereign debt. Global sovereigns tend to correlate and yields have risen across the board.

The second revision to Q2 GDP was unchanged at 1.5%. Consumption was increased from 3.2% to 3.4%. The PCE Price Index was revised upward as well. Consumption contributed 2.3% to GDP growth while investment added .5%. The trade balance deducted 1.1% and government spending was a drag of 0.2%.

In other economic news, durable goods orders rose 1.1% in July, which beat the 0.5% estimate. Ex-transports they rose 0.4%. Interestingly, CAPEX rose only 0.2%, which is surprising given the data center buildout.

Richmond Fed President Thomas Barkin described the US economy as the tenth round of a boxing match with both fighters still standing. He is referring to the economy’s ability to withstand shock after shock, from tariffs to the Iranian war, to rising energy prices.

He compares the AI buildout to the railroad investments during the Gilded Age. Interestingly the Gilded Age also featured a huge increase in inequality which is a hot button issue nowadays.

Mortgage applications fell 1% last week as purchases fell 0.3% and refis dropped 2%. “Mortgage rates reached their highest level in three weeks, with the 30-year fixed rate up slightly to 6.78 percent. Mortgage rates have increased around 20 basis points over the past two months, which has dampened refinancing activity,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Refinance applications decreased, particularly for FHA and VA loans, and the average loan size for refinances was at its lowest since June 2025.” Added Kan, “Similarly, purchase activity was down over the week, driven by a 7 percent decrease in FHA applications. The purchase market has also slowed these past two months, with applications now 5 percent behind last year’s pace.”

Chris Whalen of the Institutional Risk Analyst had an interesting tidbit about Fannie repurchases. What do you think the biggest driver of Fannie repurchases is? Gotta be appraisal issues, right? It isn’t.

Some 80% of repurchase demands are due to missing PMI. Given that GSE and Federal regs require PMI at origination, this seems odd. It sounds like a lot of borrowers are canceling PMI once the LTV drops below the threshold. Since home prices are actually declining in a lot of MSAs (particularly in Florida and out West) some of those homes that let PMI lapse might need it again. Of all the things that can go wrong in a GSE purchase, PMI generally doesn’t leap to the top of the list the way occupancy or income fraud does.

Speaking of fraud, he also mentioned a common DSCR fraud where the borrower puts the title in a LLC and then “rents” from the LLC, effectively turning an investment property into a primary.

Mortgage delinquencies fell 16 basis points to 3.39% according to the ICE First Look. “July’s data provided another indication that mortgage performance may be finding firmer footing beneath the surface,” said Andy Walden, Head of Mortgage and Housing Market Research for ICE. “While the national delinquency rate and serious delinquency inventory declined, the more telling trend is that new default activity has eased from last year’s levels in four of the past five months, and cure activity is improving.”

Now that home price appreciation appears to be settling down from its protracted deceleration performance may be picking up.

Stocks are flattish this morning as the inflation situation isn’t improving. Bonds and MBS down small

Personal incomes rose 0.4% MOM in July, which was above the 0.2% expectation. Spending rose 0.2%, higher than the 0.1% estimate.

The all-important PCE Price Index rose 0.2% MOM and 3.7% annually. If you strip out food and energy, the index rose 0.2% MOM and 3.3% YOY. The headline number was 0.1% above expectations on a monthly and annual basis. The core rate was in line.

The acceleration in inflation from earlier this year is over, but it isn’t moving down.

This report won’t change the narrative for the Fed regarding inflation. Inflation remains too high, and I think the performance of the economy (especially the labor market) is hinting that monetary policy is not as tight as the Fed thinks it is, which means that r-star (the non-inflationary rate of interest) might be higher than the 3% level it has been in the past.

The Sep Fed Funds futures still see a roughly 2/3 chance of no move and a 1/3 chance of a rate hike.

Home prices rose 1.5% on a YOY basis in June according to the Case-Shiller Home Price Index. For the 13th consecutive month, home prices fell on an inflation-adjusted basis. The hip to be square trade continues, with Chicago leading the pack and Seattle bringing up the rear. “Homeowners and renters alike breathed a sigh of relief in June as inflation cooled to 3.5%, while the S&P Cotality Case-Shiller National Home Price Index posted a 1.5% annual gain, up from a 1.2% annual gain in May,” said Rebecca Kaufman, Associate Director of Commodities at S&P Dow Jones Indices. “While home prices continue to decline in real terms, lower inflation and firmer nominal home price growth in June helped slow that pace of erosion. The housing market remains under pressure, with 30-year mortgage rates holding near 6.5% in June,” Kaufman concluded. “As financing costs are kept high for prospective buyers, current homeowners remain reluctant to give up the low mortgage rates secured in prior years.”

Some notable gainers: Chicago (+6.9%), New York (+4.9%), Cleveland (+4.1%). The laggards include Seattle (-2%), Denver (-1.2%) and Tampa (-1.2%).

Consumer confidence fell in August according to the Conference Board. The present situation improved while expectations fell. High gasoline prices have an outsized effect on these sentiment indices, with makes sense as the Iranian war drags on.

“Consumer confidence moderated slightly in August for a second consecutive month,” said Dana M Peterson, Chief Economist, The Conference Board. “The Expectations Index slipped further into negative territory, which was offset by a moderate rise in the Present Situation Index after declining in the past three months. Consumer appraisals of current business conditions were mildly positive. Perceptions of the current labor market improved, reversing three months of moderate decline. Looking ahead, consumers were more pessimistic about business conditions and the labor market over the next six months. Expectations for household incomes moderated but remained optimistic overall.”

Inflation expectations rose with 61% expecting higher inflation going forward.

New home sales fell 10.5% MOM and 6.3% YOY to a seasonally adjusted annual rate of 607,000 units. There were 488,000 units for sale at the end of July, which represents a 9.6 month supply. The median sale price was $393,800, which was down monthly and annually.

Stocks are higher this morning on lower oil prices and bond yields. Bonds and MBS are up.

The US increased sanctions on Iran but stopped short of targeting Iran’s biggest ally, China. The measures have been dubbed “Economic D-Day” which includes targeting countries that launder oil revenues for Iran (their own currency is worthless, so they have to transact in other dollarized currencies). “We want to make clear here today that no one is above the reach of U.S. sanctions,” Bessent said when asked if the administration would target Chinese banks, or if it would avoid doing so in order to preserve relations with Beijing. Supposedly this will affect crypto as well.

“If they facilitate transactions and are part of the ecosystem that turns Iranian oil into money, into repression, they will be targeted,” Bessent said. These sanctions will also target suppliers to Iran, including aviation and technology. Of course the wildcard is crypto and if Iran is selling oil for crypto assets it can escape the brunt of the sanctions. At the end of the day, the US needs China to tell Iran to knock it off targeting ships in the Strait of Hormuz.

The countries most affected aside from Iran (i.e. their biggest trading partners) are Iraq, Turkey, China, India and the UAE.

Economic activity decelerated in July according to the Chicago Fed National Activity Index. Personal consumption and housing indicators drove the decline in the index. Production and sales were modestly positive while employment was modestly negative. The CFNAI is a meta-index of some 85 leading and lagging economic indicators and is intended to give a 30,000 foot view of how the economy is faring.

Single-family rents were up 1.5% on a YOY basis according to Cotality. “National single-family rent growth increased to 1.5% in June, marking the fourth consecutive month of stronger annual gains and the highest growth rate since late 2025,” said Molly Boesel, senior principal economist at Cotality. “While rents are rising a bit faster than they were earlier this year, the market remains much different from the rapid growth environment seen in recent years. Pricing performance continues to vary across both regions and price tiers, with higher-end rentals posting stronger gains than lower-end properties. At the local level, Midwestern markets continue to lead rent price growth, while some Sun Belt markets remain comparatively soft. Overall, June’s results point to a market that is slowly increasing rather than broadly accelerating.”

The hip=to-be-square trade continues. Note that on an inflation-adjusted basis real rents have been decreasing:

The week ahead will be dominated by the personal incomes and outlays report on Wednesday which contains the all-important PCE Price Index. We will also get new home sales, home price indices, the second estimate for Q2 GDP and consumer sentiment. The Fed’s Jackson Hole meeting is this week, with Kevin Warsh speaking on Friday. Nvidia reports earnings on Wednesday.

Business activity accelerated in August to the fastest pace since 2022. Services accelerated while manufacturing declined. Job growth was the fastest in almost two years, while pricing pressures moderated. Expectations rose as well.

“US business is booming, with firms reporting the fastest output growth for over four years so far in the third quarter as the expansion picked up further momentum in August. The survey data for the third quarter are currently pointing to annualized growth approaching 3.0%, up solidly from the 1.5% pace seen in the second quarter.

Jobs growth has also shown a welcome revival in August, with employers gaining in confidence as concerns fade over the negative economic impacts of tariffs and the conflict in the Middle East. However, the latter in particular remains a key area of concern for businesses, especially via the impact on supply lines and energy prices. Supply delays were again reported in August to one of the greatest extents seen over the past four years, clearly constraining output in many companies. Price pressures, while fading, also remain elevated and prone to renewed upward pressures should energy prices rise again.”

Treasury Secretary Scott Bessent could target nearly $1 trillion in the Treasury General Fund to put towards bond buybacks. Two senior officials mentioned the possibility, however they didn’t indicate this was a plan. Certainly the amount in the fund (which is intended to fund government operations) is much larger than the $2 - $4 billion Treasury intends to use for buybacks.

As it currently stands, Treasury will probably fund the long bond buybacks by issuing shorter-dated paper - a replay of Operation Twist from the Great Recession days.

More M&A in the mortgage business: NEXA is acquiring UMortgage. NEXA is a broker that did $14 billion in volume while UMortgage is a banker that did about $2 billion.

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

The index of leading economic indicators marginally increased in July. “The Leading Index for the US ticked up in July, marking the fourth increase over the past six months,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Most components were positive in July except consumer expectations, which continued to be a notable drag on the overall index. With the most recent gains, the LEI’s six-month growth rate turned positive for the first time in more than four years, suggesting moderate growth ahead. The economy should keep expanding, but growth is expected to be driven by business investments in AI, while the higher cost of living may reduce consumer spending, especially by lower- and middle-income households. Consequently, The Conference Board continues to forecast real GDP growth of 1.9% in 2026 and 1.9% in 2027.”

Once again, financial indicators did the heavy lifting here. The stock market has been doing yeoman’s work supporting the index. That said consumer confidence did act as a drag, which is really more about gasoline prices than anything else.

San Francisco Fed President Mary Daly said that she doesn’t see an urgent need for pre-emptive rate hikes. “There’s a lot of discussion about our credibility there. I don’t see our credibility at risk,” Daly told Bloomberg Television. “I also hear a lot about, should we be making preemptive cuts — or hikes, rather? And I don’t see a lot of evidence that that’s an urgent problem to solve.”

Mortgage applications for new homes fell 5.7% in July according to the MBA. The results from the homebuilders show that the new home market is struggling with a lot of homes for sale. Builders have been been cutting prices to make the sale.

“Purchase activity for newly built homes slowed in July, with both applications to purchase and the estimated number of new home sales falling behind last year’s pace,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “With new-home inventory still elevated, weaker demand likely reflects increased homebuyer sensitivity to higher mortgage rates. The annualized sales pace decreased for the third time in four months and at 647,000 units, fell below the average sales pace of 664,000 units during the first six months of the year.”

Stocks are flattish as oil continues to work its way higher. Bonds and MBS are up small.

The US Treasury said it would increase its repurchases of long-term US debt. Treasury Secretary Scott Bessent said the US would at least double its purchases of long-term debt from $2 billion to $4 billion. “This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations,” the department said in a statement.

The operation will start September 9 and last through November 4. The average daily volume of the US 10 year note is about $1.2 billion. So the buyback isn’t insignificant. US bond yields fell on the news. Still the fundamentals of the US bond market are unchanged - the US is running big deficits and there is a deluge of supply in the bond market in general.

Judging by the reaction in the bond market, investors are skeptical this will move yields down by much. Since the government is running a deficit, the funds to purchase longer-dated bonds will have to come from issuing shorter-term bonds. If the yield curve was particularly steep relative to history, this could make sense (I am steelmanning the policy here, not necessarily agreeing with it).

Relative to history, the yield curve is not all that steep. The chart below is the difference between the 10 year Treasury yield and the 3 month T-bill yield. The higher the number, the steeper the curve, and the more the flattening trade makes sense.

The current difference between the 3 month and the 10 year is 79 basis points. Historically that number has been around 150 basis points. So it is hard to make the argument that the yield curve should be flatter, which is what this trade is actually trying to accomplish. This appears to be a gambit to lower interest rates going into the midterms, and the initial reaction to the market is that it isn’t going to work. Note it isn’t just US Treasuries that are getting slammed - global sovereigns are worse across the board, including Japan, the UK, the Eurozone. Global sovereigns generally do correlate, so moving down US yields is going to be a Sisyphean task.

The FOMC minutes were released yesterday for the July 28-29 FOMC meeting. At that meeting, the Fed maintained rates at current levels however there were 3 dissenters who wanted to hike rates.

On the subject of inflation:

Participants acknowledged that inflation remained elevated. They noted that estimates based on available data indicated that, on a 12-month basis, total PCE inflation moved down in June, largely reflecting a sharp drop in energy prices, and that core inflation edged down. Several participants noted that price increases over the past year were broad based, spanning various categories of goods and services. Some participants remarked that price increases remained elevated in core services excluding housing. Some participants noted that, even after excluding prices of items most directly affected by tariffs and energy prices, underlying inflation appeared to be elevated. Some participants observed that materials for data centers, such as chips and steel, had registered large price increases and that consumer items such as smartphones, computer equipment, software, and electricity had also been subject to price pressures.

Most participants anticipated that inflation would step down over the rest of the year as the effects of tariffs and earlier energy price increases wane, but many participants noted the possibility that inflation might be more persistently elevated. Several participants assessed that the pass-through of past increases in tariffs into the level of prices was now largely complete and that the effects of recently announced tariffs on measured inflation would likely be modest. A couple of participants reported that their business contacts had been largely absorbing elevated input costs by compressing their profit margins, but that continued conflict in the Middle East or new supply shocks could make it difficult for them to avoid raising prices charged to consumers. A couple of other participants noted, however, that some of their business contacts judged that consumers would resist further price increases.

On the subject of policy going forward:

Many participants assessed that policy tightening would likely be necessary if inflation did not decline. Some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2 percent. Various participants suggested that financial conditions had tightened over the intermeeting period and that this development was partly a reflection of strong economic growth and market expectations that the Committee would adopt a more restrictive policy stance before long. A few of the participants who favored raising the target range for the federal funds rate at this meeting judged that doing so would likely help forestall the need for a steeper and potentially more costly sequence of tightening moves at a later stage.

Suffice it to say that if the Iran war drags on and keeps oil prices elevated the Fed is going to act. Companies are getting tariff refunds, and some (like WalMart today) said they are going to use the money to keep prices low for consumers. This should be good for inflation going forward, though it does put an asterisk by second quarter earnings numbers.

Pending home sales fell 2.3% last month according to NAR. All four regions in the US declined. “The highest mortgage rates of the year hit right in the middle of summer, and that’s pulling back contract signings,” said NAR Chief Economist Dr. Lawrence Yun. “Home prices are at record highs so houses for sale are sitting on the market longer, and fewer buyers are bidding above the asking price than a year ago, though there are large local market variations.”

Yun continued, “Job gains should bring more buyers into the market, especially if mortgage rates stabilize or decline, though that impact takes time to show up,” Yun said. “Right now, pending contracts are 30% below their pre-pandemic 2019 level, while payroll employment is 5% above. That gap points to sizable pent-up demand that should be unleashed in the coming years as more supply reaches the market and affordability improves.”

Industrial production rose 0.2% in as did manufacturing production. Capacity utilization increased to 76.3%.

Stocks are flattish this morning after a couple tough days for tech stocks. Bonds and MBS are up.

The minutes from the July FOMC meeting are due out at 2:00. They probably won’t be market-moving however be aware locking around that time.

Housing starts fell 12% MOM to a seasonally adjusted annual rate of 1.239 million units. This is down 13.5% on a YOY basis. Building permits rose 5% MOM and 3% YOY to 1.443 million units.

The MOVE Act, which aims to help housing affordability, is expected to increase demand for modular homes. Modular homes are built in a factory but are sturdier than the typical trailer-type manufactured home and sit on a permanent foundation. One of these requirements, which mandated a permanent steel frame could save $10,000 or more on a new manufactured home.

The act also directs HUD to look at financing barriers and to implement building standards similar to what they already do for manufactured housing. Note that modular homes generally have framing similar to a stick and brick built house with stronger headers and roofing. They don’t use panels and are full drywall inside.

Modular homes could be a big solution to the affordability crisis - a typical modular costs around $120 per square foot compared to $22o per square foot for a single family detached. This puts a 1500 square foot starter home comfortably below $200k and within reach of a lot more people.

“America’s really, really behind, and this is a huge, huge opportunity in America, especially with the roughly around seven million home-unit shortage that the country faces right now,” said Mark Turnbull, the founder and chief executive of St. Louis-based Module Building Systems.

Manufactured homes still dominate the space, but that represents a huge opportunity for modular homes. I could see modular subdivisions as a great investment, where the developer sells enough properties to get the capital back and keeps enough rentals to have a steady cash flow. These would sell like hotcakes in the Midwest.

Given that modulars sit on a permanent foundation and the owner generally buys the land parcel, these properties can be financed with a typical conforming loan and not a chattel loan which finances mobile homes.

Manufactured homes will go a long way towards addressing the affordability issue.

Independent mortgage banking profits increased in the second quarter, according to the MBA. “Average net production profits remained positive for the fifth consecutive quarter, continuing the industry’s turnaround from widespread losses between 2022 and 2024,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Average production volume per firm was $689 million, the highest level since the second quarter of 2022. While production revenues dropped from the previous quarter as gain-on-sale margins narrowed, production expenses also decreased, reaching their lowest level in basis points since the third quarter of 2021.”

The average pretax profit rose to 25 basis points and average volume rose to $689 million. Production revenue fell from 353 basis points to 333 bp.

Luxury homebuilder Toll Brothers reported lower earnings per share as revenues fell. Gross margins decreased to 23.9%. The K-shaped economy means that luxury should be doing well, but the affordability issue means that many homeowners in starter or move-up properties are stuck either because their mortgage rates are low (the rate lock-in effect) or because they can’t find buyers for their current properties.

To give you sense about how Toll Brothers sees the immediate future, they bumped up their share repurchase target. The promotional environment for builders (i.e. price cutting) means they would rather spend resources returning cash to shareholders over investing in the business.

Home improvement retailers Lowe’s and Home Depot reported that things remain tough for their sector. “We continue to operate in what I call ‘frozen housing market conditions,’ but we also know that we’re taking share and that we’re serving our customers better every day,” [Home Depot] CFO Richard McPhail told CNBC. “It’s a reflection of the continued investment we’ve made and the focus on executing our strategy.”

Lowes reported disappointing numbers, citing “pressure” on customers.

Stocks are lower this morning as tension continue to brew in the Persian Gulf. The 60 day ceasefire officially expired yesterday and there is the potential for hostilities with Oman. Global bonds are down this morning with the 10 year hitting 4.75%, the 30 year seeing the highest yields since 2007, and UK gilts topping 5%. Even the Japanese Government Bond is pushing 3%, the highest in 30 years.

Meanwhile, oil continues to tick higher and North Sea Brent crude is now trading over $91 a barrel.

Homebuilder sentiment inched up in August according to the NAHB Housing Market Index. That said, sentiment is relatively subdued given the affordability challenges. “While builder sentiment edged higher in August, builders continue to contend with high construction costs and broader economic uncertainty,” said NAHB Chairman Bill Owens, a home builder and remodeler from Worthington, Ohio. “Rising gas and diesel prices are pushing up material costs, and spec home building remains weak as many prospective buyers stay on the sidelines. However, the Midwest remains a bright spot for the home building industry, with new home sales up in that region more than 2% so far in 2026.”

“Our latest builder survey continues to show signs of weakness in the home building market,” said NAHB Chief Economist Robert Dietz. “August marked the 16th straight month that at least 30% of builders reported cutting prices to support demand, as well as the 16th consecutive month with the HMI below 40. Custom home builders continue to report stronger market conditions than spec builders, reflecting better conditions at the higher end of the market. Smaller, less dense markets are also outperforming larger metropolitan areas, and smaller builders report relatively stronger conditions than larger builders.”

Price cuts did decrease somewhat, with 35% of builders cutting prices versus 37% last month. The typical price cut was unchanged at 6% and 63% of builders reported using incentives.

Speaking of affordability, Redfin reported that the it takes an income of $110,000 to afford the median home. The gap between this number and median income is shrinking however, which is good news.

“The earnings needed to buy a house have stabilized after several years of deterioration, but that doesn’t mean homes are affordable to the average American,” said Redfin Senior Economist Yingqi Xu. “There’s still a double-digit gap between what the typical household earns and what they need to comfortably buy a home, leaving many prospective first-time buyers stalled on the sidelines. But even if the market isn’t becoming much more affordable, it is becoming a bit more manageable for house hunters. It’s a buyer’s market in most of the country, especially places that were once pandemic homebuying hotspots like Nashville and Austin, giving buyers lots of options to choose from and strong negotiating power.”

The hottest markets from the pandemic years are struggling with extended days on market as home sellers wait for prices to return to where they were a few years ago. Meanwhile in the Midwest buyers are bidding up homes as many MSAs simply became too cheap to ignore.

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

The week ahead will contain some real estate data, with the NAHB Housing Market Index and housing starts. We will also get the minutes from the July FOMC meeting and leading indicators. We will get earnings from WalMart, the Home Despot and luxury homebuilder Toll Brothers.

Consumer sentiment fell 8% in August according to the University of Michigan Consumer Sentiment Survey. Expected business conditions drove the decline. Older and low income consumers saw the biggest declines in sentiment. Year-ahead inflation expectations ticked up from 4.2% to 4.3%. Long-run expectations held steady at 3.3%.

Chicago Fed President Austan Goolsbee said he hopes improving inflation data can get us back to the Fed’s 2% goal. “If we can get some of this stuff into the rearview mirror then I think we get back on what I was calling the golden path, which is inflation heading back to 2%.” He said that the current 3% level is too high. “For a couple of months, we’ve been getting a little bit better readings and hopefully that will continue,”

Goldman Chief Economist Jan Hatzius thinks the Fed is unlikely to hike rates at the September meeting. He believes there are at most 4 or 5 members inclined to hike and that number isn’t going to increase further given the economic data. The September Fed Funds futures see only a 30% chance of a hike.

Interesting article in the Wall Street Journal about abandoned homes in Baltimore being the subject of bidding wars. Baltimore is one of the country’s most depressed housing markets, with high crime and limited job opportunities having driven residents away over the past 50 years. The area has been plagues by blocks of vacant homes which became magnets for crime. The cost of renovating these homes is higher than the eventual sale price of the property, which kept them vacant despite a housing shortage. Now this seems to be changing.

Interestingly, Baltimore is one of the places that most correspondent lenders will not lend, at least not DSCR loans for row houses. The area was ground zero for a massive fraud last year and is a no-go zone for most non-QM loan buyers. In addition, a rehabbed home in a neighborhood of vacant properties will be hard to appraise out. You often see massive jumps in appraised values after a rehab and that jump is a red flag for RMBS buyers. It may be justified, but it will get increased scrutiny. Most DSCR investors are happy to just avoid the place.

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

Retail sales fell 0.6% MOM in July according to the Census Bureau. This was up 5% on a YOY basis. Note that Census does not adjust retail sales for inflation, so sales were up modestly on a YOY basis despite the big monthly drop. If you strip out gasoline and vehicles, sales were down 0.2% MOM and 4.4% YOY.

The decline in retail sales and the jobs report will probably take down the Atlanta Fed GDPNow estimate from its torrid 5.8% pace to something more realistic.

Richmond Fed President Tom Barkin talked a little bit about the vibecession, where many feel like the economy is lousy despite good headline numbers. On the labor market, he said: “How can unemployment be so low when the news feels so bad? In addition to the continuing low-hire, low-fire environment, the low unemployment rate is also a result of a different, delicate balance: slowing labor demand growth has been accompanied by slowing labor supply growth.”

Consumer spending remains robust, and business investment is strong, even after data center spend. Many businesses sat on the sidelines in 2025, waiting for the uncertainty regarding tariffs etc to dissipate. While that uncertainty is still there, they are to the point where they cannot afford to wait any longer.

“Today, you could argue the fog still hasn’t lifted. Tariff rates are still uncertain. The conflict in the Middle East continues. Borrowing rates are up. And yet, in the first half of 2026, real private nonresidential fixed investment grew at an annualized rate of 9.5 percent. For comparison, the average growth rate in the much more stable decade prior to the pandemic was 5.8 percent...It’s not only data centers, however. I am starting to hear investment momentum elsewhere, too. Bank pipelines are healthy. Mergers and acquisitions are active. Leases are being signed. Factories are being built. The defense sector is booming. Many business leaders explain they’ve concluded high uncertainty is the new baseline. They can’t afford to wait any longer.”

Mortgage delinquencies decreased to 4.37% in the second quarter according to the MBA. This was down 7 bp from Q1, but up 44 from the same quarter a year ago. The number of loans in the foreclosure process rose 3 basis point to 0.67%. “Mortgage delinquencies decreased slightly across all loan types in the second quarter of 2026. Nonetheless, the broader trend is that both delinquencies and foreclosures have increased over the past year,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “The mortgage delinquency rate rose 44 basis points and the foreclosure inventory rate increased by almost 20 basis points from last year’s second quarter.”

Added Walsh, “Some loans are continuing to move to later stages of delinquency. The seriously delinquent rate – the non-seasonally adjusted percentage of loans that are 90 days or more past due or in the process of foreclosure – increased for the fourth consecutive quarter. Furthermore, FHA serious delinquencies are becoming pronounced, increasing more than 225 basis points from the previous year.”

Note the Wall Street Journal had an editorial about United Wholesale’s FHA delinquency rate, which made an astonishing claim that 21.5% of UWM’s FHA production went seriously delinquent within two years of origination. That is astounding.

The ICE Mortgage Monitor reported that delinquencies rose 5 basis points in June to 3.55%. Foreclosure starts were up 29% MOM and 44% YOY. Foreclosure activity hit a 6 year high, although it is rebounding from being artificially suppressed during the COVID years.

Increased DQ rates are being driven by FHA loans:

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

Inflation at the wholesale level was flat month-over-month and rose 4.7% YOY according to the Producer Price Index. The headline number was a little better than expectations. Ex-food and energy the PPI rose 0.2% MOM and 4.2% YOY.

Oil prices are moving lower after the International Energy Agency forecasted falling demand going forward. Saudi Arabia has also shifted delivery to Mediterranean pipelines to avoid Yemeni fire in the Red Sea. The longer oil stays elevated, the more supply will come on line. The cure for high prices is high prices.

UWM is suing Two Harbors over the failed bidding war alleging that Two Harbors undermined their deal. Two Harbors has responded by calling the lawsuit frivolous. The Two Harbors Board of Directors has a fiduciary duty to their shareholders to get the best price, and ultimately shareholders decided cash was preferable. Given the performance of UWM stock, that was the correct choice. Ultimately it was not Two Harbor’s fault that UWM hedged their MSR portfolio (when it doesn’t hedge its own) and lost money on the trade.

Mortgage lock volume declined 11% MOM but remained 5% above last year, according to Optimal Blue. “Mortgage rates moved higher across all major products in July,” the report noted. The Optimal Blue Mortgage Market Indices (OBMMI) 30-year conforming fixed rate rose 26 basis points MoM to 6.72%, essentially unchanged from a year ago. The 10-year Treasury yield climbed 31 basis points to 4.75%, while the spread between the 10-year Treasury and the OBMMI 30-year conforming rate narrowed 5 basis points to 197 basis points.

“July was a clear reminder of how sensitive this market remains to rate movement,” noted Mike Vough, senior vice president of corporate strategy at Optimal Blue. “A 26-basis-point rate increase was enough to pull both purchase and refinance volume meaningfully below June’s pace.”

Interesting note for mortgage servicers: the OCC issued a rule in May that allows OCC-regulated banks to not pay interest on mortgage escrow accounts even if the customer lives in a state that requires them. This was a big issue during the days of 0% interest rates when servicers were statutorily required to pay a minimum escrow interest rate even though the underlying account was paying nothing.

At the margin, this should help MSR valuations by reducing the cost of servicing.

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

Inflation at the consumer level rose 0.1% MOM and 3.4% YOY according to the Bureau of Labor Statistics. Ex-food and energy, the index rose 0.2% MOM and 2.5% YOY. These numbers were in line with expectations. Shelter rose 0.1% in July and accounted for about 2/3 of the increase in CPI. Shelter inflation was 3.2% on a YOY basis.

Energy was the big driver of the YOY increase in headline inflation, with gasoline prices up 25% YOY. Food was up 0.1% MOM and 3.0% YOY.

Existing home sales fell 1.7% last month to a seasonally adjusted annual rate of 4.06 million units. Sales were up 0.7% YOY. “Home sales have been remarkably stable, even amid the rising mortgage rate environment of the past few months,” said NAR Chief Economist Lawrence Yun. “Year-to-date sales are up 2.4% and there’s no doubt that the housing market would be thriving if average mortgage rates were to return near 6%.”

“Though the national data shows stabilization, there are notable local market variations,” Yun said. “In smaller cities, and particularly in the Midwest, an annual household income of $60,000 would be sufficient to buy a median-priced home.”

The median home price rose 2% to $434,100, while inventory fell to a 4.5 month supply.

Mortgage applications increased 3.6% last week as purchases rose 3% and refis rose 5%. “After five consecutive weeks of increases, mortgage rates declined slightly last week as oil prices dipped briefly on the hopes of a sustained resolution to the war in Iran. The 30-year fixed rate decreased four basis points but remained close to its highest level in a year at 6.77% ,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “The reprieve in rates supported an increase in both purchase and refinance applications over the week, although the pace of applications has fallen below last year’s pace in recent weeks. As refinance incentives have dwindled with rates at current levels, the average loan size for refinance applications was down to its lowest level since July 2025.”

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

Oil prices are working their way higher as optimism for a deal in the Strait of Hormuz fades. Markets are “confident that we can get to some sort of agreement, even if it may be a fudge,” Modupe Adegbembo, an economist at Jefferies, told CNBC’s “Squawk Box Europe” on Monday. “It may not be a great agreement, but it may be something that allows more oil and more things to flow through the Strait of Hormuz.”

If no deal materializes, we could see oil prices push higher, however the longer prices stay elevated the more marginal supply comes to market, especially in North America.

Small business optimism improved in July, according to the NFIB. The index rose above its highest level in a year. Hiring drove most of the increase, and eight of the ten components rose. Uncertainty rose, and expected sales fell. We got some good news on the inflation front - the net number of firms raising prices fell for the first time in four months. Labor quality / availability was listed as the number one problem, while fewer firms cited inflation.

Main Street has become a bit more optimistic about future economic
developments. The NFIB Small Business Optimism Index improved
significantly, managing to exceed the 52-year average. The gain was driven by a substantial improvement in hiring plans, accompanied by an improvement in plans to make capital expenditures. Capital investments have been driving economic growth, primarily AI investments in chips and structures to house them in. Although this is not primarily a small-firm activity, it looks like spillover business opportunities are reaching them.

The stock market has been rewarding shareholders very well, and this is supporting a lot of spending by the wealthier consumers who hold equity. Restaurants, car dealers, home improvement companies, etc., all benefit from the wealth being created in the tock markets. Enjoy it while it lasts. The unemployment rate is staying low, and the inflation rate is bothersome, driven primarily by oil prices. A favorable resolution of the war with Iran will significantly reduce oil prices when it finally happens. The world has plenty of oil.

There was a significant decline in the full suite of inflation metrics, led by the percentage of owners raising their average selling prices. This is an especially good sign since it occurred while consumer spending stayed solid and compensation was still rising. The Fed has turned its attention to managing the inflation rate, which is well above the 2% target. Interest rates respond to expected inflation using current experience as a guide. The Fed has indicated that it will pay close attention to developments. Uncertainty remains high, most likely due to the status of the war with Iran. A meaningful resolution will be a major plus for the economy and small business owners.

The part about the wealthy spending is interesting and it highlights the K-shaped economy, where the top end of the income distribution is doing fine, but the lower end is not. This phenomenon is driving some of the Democratic Party’s flirtation with socialism and this will not be a positive for small business, especially small businesses in deep blue cities like Seattle and New York City. I would expect to see the uncertainty index rise, driven by political risk as much as oil prices. This will be something to watch.

Still it looks like business optimism is on the upswing, so this is some to watch

Cleveland Fed President Beth Hammack doesn’t think a quarter point increase in the Fed Funds rate will do much damage to the economy. “I don’t know exactly where we’ll end...in general one 25-basis point move probably doesn’t do a whole lot for the economy,” Hammack said Monday in an interview with Yahoo Finance. “It’s probably...some number of movement, but I don’t want to prejudge what that number is going to be.”

“When I’m talking to businesses, I’m not hearing that they’re sensing any restraint from investments in growth based on where interest rates are,” Hammack said. “So to me that says that now is the time to act.”

Mortgage credit availability increased in July, according to the MBA. “Credit availability in June increased to its highest level since July 2022, as greater availability and expanded guidelines for ARM and streamline refinance loans, including some with lower documentation requirements, drove most of the increase,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Jumbo credit availability has grown in almost every month this year and this month’s increase brought the jumbo index to its highest level since 2020. Additionally, non-QM loan programs continue to account for a substantial share of this growth.”

If the government wants to privatize the GSEs, it might want to pay attention to how much volume is going to non-QM. Fan and Fred market share will continue to erode.

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

The week ahead will be dominated by the CPI on Wednesday and the PPI on Thursday. We will also get retail sales and existing home sales. Tom Barkin and Beth Hammack will also speak on Thursday. Earnings season is on the back nine, and most of the financials have already reported.

Richmond Fed President Tom Barkin said that the US economy may be entering a period of greater instability. “We may be moving into a world of greater instability,” Barkin said, according to prepared remarks. “Persistent shocks—whether from geopolitics, inflation, debt, cyber threats, or the AI transition—can challenge the economy’s resilience and complicate monetary policy.”

He remains concerned about inflation: “If inflation remains sticky and job growth stays strong, that could shift the risk outlook,” he noted, suggesting that the central bank might need to hold rates higher for longer or even consider hikes if shocks compound price pressures. We’re in a good place to respond to ongoing shocks,” Barkin said, “but we need to see how these forces play out.”

After the disappointing jobs report, the Fed Funds futures are now leaning towards no change in policy at the September meeting, however it is a close call: 55% versus 45%.

The Atlanta Fed GDP Now model sees the economy growing at a torrid 5.8% in pace in Q3. This number does not include Friday’s jobs report, so we will see how much that changes in the new model run coming out on Thursday.

The US housing market has settled into a slower pace this summer, giving buyers a bit more leverage. “Late summer—especially this one when the housing market favors buyers in most places—offers the chance for people who are motivated to move this year to negotiate,” Chen Zhao, Redfin’s Head of Economics Research, said. “Buyers should use this time to explore the market more seriously, while sellers should consider what they’re willing to sacrifice to make a deal happen.”

Sales of starter homes (costing around $200k according to Zillow) fell 5.4% in May. Zillow estimates a starter home price is around 202k, which is up 2.3% YOY. That said, they aren’t flying off the shelves as buyers remain hesitant. Meanwhile, luxury sales rose.

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

The economy lost 23,000 jobs in July, according to the Employment Situation Report. The unemployment rate fell to 4.1%. The unemployment rate was driven by a 264k decrease in the labor force and a 178k decrease in the number of unemployed. The labor force participation rate fell 0.1% to 61.4% and the employment-population ratio fell 0.1% to 58.9%.

Healthcare and social assistance added the most jobs, while payrolls fell in government and leisure / hospitality.

This report will certainly challenge the Fed’s narrative that the employment side of the dual mandate is under control. That said, they are mainly concerned with managing the unemployment number, which did fall.

Average hourly earnings rose 0.1% MOM and 3.2% YOY. Bonds are reacting positively on the report. The September Fed Funds futures now see a 45% chance of a rate hike, down from 55% yesterday.

Rocket reported second quarter earnings of $0.08 per share compared to a loss of a penny a share a year ago. Volume was $49.1 billion, while gain on sale was 2.48%. The stock is down about a percent pre-open, which is much better than crosstown rival United Wholesale, which got taken to the woodshed for 35% yesterday.

Nonfarm productivity increased 1.4% in the second quarter as output increased 1.7% and hours worked rose 0.3%. Unit Labor costs rose 1.3%, reflecting a 2.7% increase in compensation and the 1.4% increase in productivity. The productivity number was better than expectations.