All Things in Moderation

Vital Statistics:

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

Why has the bond market sold off in the wake of the rate cut on Wednesday? IMO, it is because the dot plot for 2026 is much more hawkish than the Fed Funds futures were predicting.

Before the FOMC meeting, the December 2026 futures saw a range of 2.75%-3.0% rate as the most likely, 3.0% – 3.25% as the second most likely and 2.5%-2.75% as the third most likely. Today, the futures see 3.0% – 3.25% as the most likely scenario, 2.75%-3.0% as the second most likely scenario, and 3.25% – 3.5% as the third most likely scenario.

In essence the Fed Funds futures have increased their 2026 forecast by roughly 25 basis points, and that is what is driving the action in the 10 year.

The Index of Leading Economic Indicators declined in August, according to the Conference Board. The index declined by 0.5%, after rising 0.1% in July. The only positives in the index are market-related (i.e. credit spreads and the movement in the stock market). All other components (anything real-economy related) were negative. These include initial jobless claims, building permits, and new orders.

“In August, the US LEI registered its largest monthly decline since April 2025, signaling more headwinds ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Among its components, only stock prices and the Leading Credit Index supported the LEI in August and over the past six months. Meanwhile, the contribution of the yield spread turned slightly negative for the first time since April.

“Besides persistently weak manufacturing new orders and consumer expectation indicators, labor market developments also weighed on the Index with an increase in unemployment claims and a decline in average weekly hours in manufacturing. Overall, the LEI suggests that economic activity will continue to slow. A major driver of this slowdown has been higher tariffs, which already trimmed growth in H1 2025 and will continue to be a drag on GDP growth in the second half of this year and in H1 2026. The Conference Board, while not forecasting recession currently, expects GDP to grow by only 1.6% in 2025, a substantial slowdown from 2.8% in 2024.”

In other words, the only thing holding up the economy is the stock market, and the stock market cannot ignore the real economy forever.

Homebuilder Lennar disappointed this morning with soggy third quarter earnings. Earnings fell over 50% compared to a year ago.

“Our third quarter results reflect both the continued pressures of today’s housing market and the consistency of Lennar’s operating strategy. This quarter, we delivered 21,584 homes and recorded 23,004 new orders. Achieving these results required additional incentives, resulting in a reduced average sales price of $383,000, and our gross margin drifted down to 17.5%, while our SG&A expenses came in at 8.2%, reflecting the soft market conditions.” 

“requiring additional incentives” is corporate-speak for cutting prices to move the merchandise. Builders have generally been doing this via cut-rate mortgages.

Note famed value investor Warren Buffett bought a big slug of Lennar this year.

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