Stocks are flat ahead of the long weekend. Bonds and MBS are down small.
Personal Incomes rose 0.4% MOM in July, which was in line with Street expectations. Personal Expenditures rose 0.5%, again in line with expectations.
The PCE Price Index (The Fed’s preferred measure of inflation) rose 0.2% MOM and 2.6% YOY. If you exclude food and energy, the index rose 0.3% MOM and 2.9% YOY.
Durable goods inflation increased to 1.1%, while non-durable goods inflation decreased to 0.2%.
Inflation has picked up a touch from Liberation Day, rising about 30 or 40 basis points. But it has not created this huge acceleration back to 6%. At least not yet.
This probably still gives the Fed the green light to cut rates at the September meeting, especially if the jobs report next week is soft again. The Sep Fed Funds futures still see a 87% chance of a rate cut.
Pending Home Sales fell 0.4% MOM in July, according to NAR. This was still a 0.7% YOY increase. “Even with modest improvements in mortgage rates, housing affordability, and inventory, buyers still remain hesitant,” said NAR Chief Economist Lawrence Yun. “Buying a home is often the most expensive purchase people will make in their lives. This means that going under contract is not a decision home buyers make quickly. Instead, people take their time to ensure the timing and home are right for them.”
“Rising mortgage applications for home purchase are an early indicator of more serious buyers in the marketplace, though many have not yet committed to a pending contract. The Federal Reserve signaling that they may enact a lower interest rate policy should steadily enlarge the pool of eligible home buyers in the upcoming months.”
MBS spreads continue to improve. MBS spreads are being defined here as the difference between the 30 year fixed rate mortgage and the 10 year Treasury. MBS traders will note that this isn’t exactly correct, but it is close enough for our purposes. The spread has been narrowing for the past couple of years and currently stands at 230 basis points.
On a historical basis going back 40 years, this is still an elevated level. The pre-pandemic years of ZIRP were much lower, and even the pre GFC levels were lower. We are still around 50-60 basis points above normalcy.
Stocks are higher as we await Jerome Powell’s speech in Jackson Hole. Bonds and MBS are up small.
Jerome Powell will be speaking at 10:00 am today. I don’t see the prepared remarks anywhere yet.
Existing home sales rose 2% last month, according to NAR. “The ever-so-slight improvement in housing affordability is inching up home sales,” said NAR Chief Economist Lawrence Yun. “Wage growth is now comfortably outpacing home price growth, and buyers have more choices. Condominium sales increased in the South region, where prices had been falling for the past year.”
“Near-zero growth in home prices suggests that roughly half the country is experiencing price reductions. Overall, homeowners are doing well financially. Only 2% of sales were foreclosures or short sales – essentially a historic low. The market’s health is supported by a cumulative 49% home price appreciation for a typical American homeowner from pre-COVID July 2019 to July this year,” Dr. Yun continued.
“Homebuyers are in the best position in more than five years to find the right home and negotiate for a better price. Current inventory is at its highest since May 2020, during the COVID lockdown.”
The index of leading economic indicators fell in July, according to the Conference Board. “The leading economic index for the US decreased just slightly in July,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Pessimistic consumer expectations for business conditions and weak new orders continued to weigh down the index. Meanwhile, stock prices remained a key positive support of the LEI. Initial claims for unemployment insurance were much lower in July than in June and were the second most positive component of the LEI, after contributing negatively to the index over the previous three months. While the LEI’s six-month growth rate remains negative, it improved slighlty in July—but not enough to avoid triggering the recession signal again. Despite that, The Conference Board does not currently project a recession, though we do expect the economy to weaken in H2 2025, as the negative impacts from tariffs become more visible. Overall, real GDP is projected to grow by 1.6% year-over-year in 2025, before slowing in 2026 to 1.3%.”
The stock market component of the LEI is holding the index up. The other components are deteriorating.
Stocks are flat despite a hotter-than-expected PPI print. Bonds and MBS are down.
Inflation at the wholesale level rose 0.9% MOM in July, which was much higher than the Street estimate of 0.2%. On a YOY basis, prices rose 3.3%. If you exclude food and energy, the numbers were even worse: a 0.9% MOM jump and a 3.9% YOY increase. The core rate, which excludes food, energy and trade services rose 0.6% MOM and 2.8% YOY.
June’s numbers were unusually low, showing zero monthly inflation, so perhaps the July numbers were exhibiting some “catch up.” Trade services were the big driver, which represents retail and wholesaler margins. Machinery and equipment accounted for 30% of the jump. On the goods side, about of a quarter of the increase came from vegetables.
While some of the increase can be traced to tariffs (the equipment and machinery probably is), it appears a lot of it (hotels, portfolio management, investment advice, trucking) are not. Note this reading is the first with a new methodology which eliminated some 350 categories it used to track. As a result, the numbers are not really comparable to previous readings. So you might want to put an asterisk next to this.
The initial reaction in the bond market is negative, with the 10 year down about 3 basis points since the report came out.
Treasury Secretary Scott Bessent made some comments regarding Fed policy and possible replacements for Jerome Powell when he steps down. When asked about Powell’s replacement, Bessent laid out a laundry list of names including the two Kevins (Warsh and Hassett), along with Michelle Bowman, Laurie Logan and a few other names.
Bessent’s comments on monetary policy urged rate cuts: “If we’d seen those numbers in May, in June, I suspect we could have had rate cuts in June and July. So that tells me that there’s a very good chance of a 50 basis-point rate cut,” in September, Bessent said in an interview on Bloomberg television.
“Rates are too constrictive…We should probably be 150 to 175 basis points lower,” Bessent said, adding to the Trump administration’s penchant for public criticism and detailed policy advice for the independent central bank. While Trump would like to see rates around 1%, Bessent was arguing for a 2 handle on the Fed Funds rate, which is below neutrality (r*).
Next week is the Jackson Hole Summit, and markets will be anticipating a signal that rates are coming down in September. The Fed Funds futures see a cut as a certainty and are pricing in a small chance of a 50 basis point cut. The December futures are starting to price in a small chance of 100 basis points in cuts this year.
The Trump Administration teased the idea of IPO-ing Fannie Mae and Freddie Mac “I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President,” Trump added.
Generally speaking the term “taking a company public” means an IPO (initial public offering). If you issue stock for a company that is already trading, it is called a secondary offering.
Fannie Mae trades already on the OTC Bulletin Board Exchange (aka the pink sheets). Freddie Mac does as well. Fannie Mae’s ticker is FNMA and Freddie’s is FMCC. These stocks have been on a tear since Trump got elected, and trade nearly 10 million shares a day. The companies have a market cap of about $12 billion.
So if Trump wants to sell Fannie and Freddie stock to the public, why would he characterize it as “taking these companies public” and not as a secondary offering? That language implies that a new stock is coming, not a sale of additional shares of FNMA or FMCC. So if that is the case, what happens to the older stock that is currently trading? It is helpful to remember how we got here.
During the Great Recession and Financial Crisis, the government took over 80% of Fannie and Freddie and placed them in conservatorship. Why did they take over 80% and not 100%? Because then the government would have had to consolidate all of Fannie and Freddie’s outstanding MBS into the national debt. This would have added trillions of liabilities to the US balance sheet. Instead, it is treated as a contingent liability – a form of off-balance sheet financing. The Fannie and Freddie stock currently trading exists solely as an accounting convenience for the government. The government is entitled to all of Fan and Fred’s profits, and FMCC / FNMA shareholders have no claim to it nor do they have voting rights. This isn’t a normal stock, like owning shares of Apple.
The Obama Administration was adamant that if the GSEs were ever released from conservatorship that the extant shareholders should get nothing. The company was insolvent when it was taken over and under a normal bankruptcy / reorganization the shareholders would have been wiped out. Granted Trump isn’t Obama, but the logic hasn’t changed and the use of the term “taking the companies public” should be taken as an ominous sign.
So if there is an IPO, what would become of the old stock? It probably won’t be fungible with the new stock and won’t be entitled to dividends, a vote, or have a claim on the profits / assets of the company. If the government declares the old stock worthless, it will become a litigation lottery ticket as activist hedge funds sue the government to force them to give the shareholders something. But anyone getting excited about Fan and Fred going public should keep in the back of their minds that the current FNMA and FMCC stock might not participate in the emancipated entity and could be worthless even if Fan and Fred thrive.
Nobody knows what Trump is thinking here, but if this was happening under Biden or Obama the stock would be worthless.
Stocks are lower this morning on a disappointing jobs report. Bonds and MBS are up.
The economy added 73,000 jobs in July, which was lower than expected. The unemployment rate ticked up 4.2%, while the labor force participation rate fell again. Healthcare and social assistance led the job growth, while manufacturing fell.
The internals of the jobs report are bad yet again. The jobs created were completely driven by statistical and seasonal adjustments. The number of people actually collecting paychecks fell from 163.37 million to 163.1 million, or a decrease of 260,000. The number of people unemployed rose from 7 million to 7.2 million, while 239,000 people exited the labor force.
The labor force participation rate and the employment-population ratios both fell:
The two month revisions were godawful as well, with May falling from +144,000 to +19,000 and June decreasing from +147,000 to +14,000. Bottom line: The labor market is a lot weaker than the Fed is giving it credit for.
The Fed’s dual mandate it to target PCE Price Inflation along with unemployment. The unemployment rate is being held down by people exiting the labor force, which is not indicative of a healthy job market. We have had a solid string of job losses in professional and business services, which is Ground Zero for AI.
WSJ reporter Nick Timaros quietly signaled to the markets that a September rate cut is unlikely. “Officials are betting they can afford to wait at least two months for clarity on whether tariffs will slow economic activity, fuel inflation, or pass by with little effect. That patience comes with risks—on both sides.”
Two months = August and September. Meanwhile, the labor market continues to deteriorate.
The bright side is that the yield curve is beginning to do the work for the Fed. The 10 year is now at the lower band of the Fed Funds target rate, which means we are looking at an inversion. So mortgage bankers can take at least some solace.
Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojkt
All Things in Moderation 