All Things in Moderation

Vital Statistics:

Stocks are higher this morning after the the Trump Administration announced a trade deal had been struck with China. Bonds and MBS are down small.

The Trump Administration announced a “signed” trade deal with China late last night, and Treasury Secretary Scott Bessent said that deals are “imminent” with 10 other trade partners. “We just signed with China yesterday,” Trump said during an unrelated event at the White House, though he did not provide further details. China said “both sides have confirmed further details on the framework.” The deal includes a commitment from China to sell rare earth metals to the US.

Here is an interesting graph of historical tariff rates in the US:

Kind of makes the whole thing look like a tempest in a teapot, doesn’t it?

Personal incomes fell 0.4% in May according to the BEA. The decrease was primarily attributable to a decrease in government social benefits. Personal outlays (i.e. spending) decreased 0.1%, which was primarily attributable to a decrease in spending on autos. The personal savings rate decreased a touch to 4.5%.

The all-important PCE Price Index rose 0.1% MOM and 2.3% YOY. This was in line with expectations. The core PCE Price Index rose 0.2% MOM and 2.7% YOY. The core index was a touch hotter than expectations, but it showed no major uptick due to tariffs.

Goods inflation (the area where you would most expect to see indications of tariff inflation) increased to 0.1% on a YOY basis, compared to the previous month where goods inflation fell 0.4%. Durable goods inflation rose 0.5% YOY while non-durable goods inflation fell 0.2%. Shelter inflation rose 0.3%, and appears to remain one of the bigger (albeit decreasing) drivers of inflation.

The increase in core PCE inflation was driven by services, which rose 3.4%, which was the same as April and has been on a general downtrend. Overall PCE inflation does not seem to have deviated from the overall trend we have seen for the past six months:

Bottom line: Still no sign of tariff-induced inflation. At some point, the Fed is going to have to admit that the economy is slowing and instead of stagflation, we are heading for stagnation.

Pending Home Sales rose 1.1% MOM and 1.8% YOY according to the National Association of Realtors. Contract signings increased in the Midwest and South, while they fell in the West and Northeast. “Consistent job gains and rising wages are modestly helping the housing market,” said NAR Chief Economist Lawrence Yun. “Hourly wages are increasing faster than home prices. However, mortgage rate fluctuations are the primary driver of homebuying decisions and impact housing affordability more than wage gains.”

Prices are rising smartly in the Northeast, boosted by limited inventory. Inventory is increasing however, with homes for sale rising 31.5% on a YOY basis. Inventory increased the most in the West (up 40%) and th

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Vital Statistics:

Stocks are flattish this morning as investors return from the Juneteenth holiday. Bonds and MBS are down.

As expected the Fed maintained interest rates at current levels, and cut its forecast for the number of rate cuts in 2025 again. If you look at the consensus dot plot, it seems there are two major groups: those that think the Fed won’t cut rates at all this year, and those that think the Fed will deliver two cuts:

In the table of economic projections, they took down their estimate for GDP growth from 1.7% to 1.4%, and bumped up their estimate for end-of-year core PCE growth from 2.8% to 3.1%. The estimate for unemployment was raised from 4.4% to 4.5%. In the press conference, Jerome Powell said the Fed expects a “meaningful” amount of inflation in the coming months.

Meanwhile Trump expressed his disappointment in Powell, saying: “What I’m going to do is, you know, he gets out in about nine months, he has to, he gets fortunately terminated … I would have never reappointed him, (President Joe) Biden reappointed him. I don’t know why that is, but I guess maybe he was a Democrat… he’s done a poor job,” Trump said. FHFA Director Bill Pulte said that Powell should resign.

Powell cites the strength of the labor market as his justification for keeping policy tight. Fair enough. That said, if you focus solely on one data point in the labor market – the unemployment rate – the labor market looks strong. But if you peek behind the curtain, the internals paint a different picture. Job growth has been driven by demographic statistical adjustments and not paychecks, while previous months have been quietly revised downward. The declining unemployment rate is being driven by a decrease in the labor force, which is not the way you want to do it. It isn’t job growth that is driving it – it is discouraged unemployed workers throwing in the towel.

I think the Fed has gone from its role of reacting to data to one where it is making bets, and that really isn’t their bailiwick. It would be one thing if the Fed Funds rate was at r* or the neutral rate, but it isn’t. The Fed is 100 basis points over r* when the current economic data says they should be neutral. At this point the Fed needs inflation to spike or else they will be making a major policy mistake. Powell is essentially drawing into an inside straight.

Bayview Asset Management is buying Guild Mortgage for an equity value of $1.3 billion. In the latest 10-Q, Guild is valuing the servicing portfolio for the same amount, so Bayview is paying little for the retail origination arm.

“Expanding the Guild relationship with Lakeview creates one of the strongest and most compelling mortgage origination and servicing ecosystems in the nation,” said Guild Chief Executive Terry Schmidt. “Our expertise in distributed retail origination, retained servicing, and the customer-for-life balanced business model makes this a complementary partnership that has powerful potential for growth and innovation.”

“We are pleased to forge a stronger strategic partnership between Lakeview and Guild through this transaction, and look forward to expanding opportunities and delivering exceptional service to our customers,” said Juan Gonzalez, Managing Director and CEO of Lakeview Originations. “With each company’s different strengths and areas of expertise, this collaboration will form one of the most dynamic mortgage origination and servicing platforms in the industry.”

“We are excited for this next chapter of the Guild story,” said Guild Holdings Chairman Patrick Duffy. “The entire board of directors is confident that Bayview will be an excellent steward of this exceptional company and a great platform for continued growth.”

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Vital Statistics:

Stocks are lower this morning after Israel attacked Iran. Bonds and MBS are up.

Oil is up big this morning after Israel attacked Iran‘s nuclear facilities and weapons factories. President Trump warned Iran to make a deal: “They should now come to the table to make a deal before it’s too late. It will be too late for them. You know the people I was dealing with are dead, the hardliners,” the president said. He would not specify which people he was referring to.

The attack on Iran is boosting the US dollar and putting a bid under oil and the 10 year bond. North Sea Brent futures are up about 7%, while WTI is up 8% in sympathy.

We had another successful bond auction yesterday, where Treasury auctioned off $22 billion of 30 year bonds. Demand was strong again, with a bid-t0-cover ratio of 2.43.

The MBA applauded the Senate’s bill to end abuses of trigger leads, which can cause a barrage of unsolicited calls to an unsuspecting borrower on a credit pull.

“The Senate passage of this important bill, following similar legislation advancing in the House Financial Services Committee earlier in the week, is an enormous step toward finally putting a stop to trigger lead abuses.

“We commend Senators Jack Reed (D-RI) and Bill Hagerty (R-TN), as well as the bill’s dozens of bipartisan cosponsors, for their continued leadership on this issue – a top MBA advocacy priority.  

“MBA looks forward to working with the sponsors and House and Senate leadership to reconcile the slight differences in the two bills so that one bill can be passed in both chambers and signed into law as quickly as possible.” 

Inputs for housing construction rose 0.2% MOM in May after falling 0.2% MOM in April, according to an analysis of yesterday’s producer price index from the NAHB. On a year-over-year basis they increased 1.9%. The goods component – i.e. sticks and bricks – rose 1.6% while the services component rose 2.3%.

If there is any sort of tariff-related increase in housing construction, it isn’t evident in the latest numbers or the graph below:

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Vital Statistics:

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

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

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

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

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

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

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

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

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

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