Good Afternoon!
It’s been a couple weeks since my last Newsletter. Hope you enjoyed the warm weather and got outside! Our preschoolers had last week off, so we enjoyed time with them at home, at the Zoo and at the pool. They also spent the night with my folks for 2 nights, and my wife and I were able to spend some alone time, which consisted of margaritas and re-watching the Sopranos, Goodfellas, and Casino.
The last two weeks in the bond market have been a wild ride, yet again. A LOT of 10 basis point per day movement in the 10 YR. Some up and some down. But, since the 9th, the 10 YR is down to 4.32% (as of this morning) from 4.50%. We will still need to see the job market slow down and for the Unemployment Rate to pierce 4.5% (Currently 4.2%) before we get a meaningful leg down on the 10 YR and 30 YR fixed mortgage rates to follow suit. The Mortgage Spread is still around 2.5%, so with a 4.32% 10 YR yield, mortgage rates, on average, are still around 6.875%.
NO NEWSLETTER NEXT WEEK – SUMMER BREAK FOR MY KIDS
1 Year Look at The 10 Year Treasury Chart:
Last Week’s Market Commentary:
Fed Holds Rates Steady, Signals Ongoing Caution
o As expected, the Federal Reserve unanimously voted to keep the Federal Funds Rate unchanged at 4.25% to 4.5%, extending the pause that began in January. The move reflects the Fed’s cautious approach as it navigates the dual challenge of controlling inflation while supporting employment.
o It’s important to note that while the Fed Funds Rate directly impacts overnight lending between banks, it indirectly influences broader borrowing costs, including credit cards, auto loans, and mortgage rates.
o The Fed remains focused on its dual mandate: price stability and maximum employment. Balancing these priorities has become increasingly complex, especially with new tariffs adding to economic uncertainty. Persistent inflation makes the case for keeping rates higher for longer, while signs of economic weakness could push the Fed toward rate cuts.
o Looking ahead, the Fed will be closely monitoring upcoming inflation and labor market data to guide future policy moves. Notably, the Fed’s latest projections show core PCE inflation rising to 3.1% for 2025—up from a previous estimate of 2.8%—and the unemployment rate ticking up to 4.5% from 4.4%.
o Despite these challenges, most Fed officials still anticipate two rate cuts by the end of this year, contingent on how the data evolves.
Housing Starts and Permits Hit 2025 Lows
o Following a brief uptick in April, Housing Starts dropped nearly 10% in May, driven largely by a sharp decline in multifamily construction. Single-family starts held steady, rising a modest 0.4% from the previous month.
o Building Permits, a leading indicator of future construction, also declined—down 2% overall, with single-family permits falling 2.7%. At 1.26 million for Housing Starts and 1.39 million for Permits, both annualized rates are now at their lowest levels of 2025. These figures estimate how many homes would be built over the next year if construction continued at the current pace.
o While Building Permits often signal future supply, many approved projects may never break ground due to rising costs—especially those tied to new tariffs. In contrast, Housing Starts provide a more accurate measure of inventory growth, since construction is already underway.
o May’s seasonally adjusted annual rate of 1.26 million starts falls well short of the 1.8 million new households formed annually over the past five years. Even with 1.53 million completions, new home supply continues to lag behind demand—a dynamic that’s likely to keep upward pressure on home values in the months ahead.
Retail Sales Weaken in May
o Retail sales fell 0.9% in May, a sharper drop than the expected 0.7% decline, marking the second straight monthly decrease after a 1.5% surge in March. That March spike was likely driven by consumers rushing purchases ahead of anticipated tariff changes.
o Out of the thirteen retail categories tracked, seven posted declines, with the largest pullbacks seen in autos, building materials, and gasoline.
o On a more positive note, the “control group”—which excludes autos, gasoline, building materials, and food services—rose 0.4%, beating expectations. This component is closely watched as it feeds directly into second-quarter GDP estimates.
o Retail sales are a key indicator of consumer spending, which plays a central role in gauging the strength of the overall economy. While May’s decline disappointed, it may reflect a return to normal after March’s surge. Federal Reserve officials will be watching upcoming retail data closely, as shifts in consumer behavior will help shape future interest rate and monetary policy decisions.
Deeper Dive into The US Labor Market – with Help From Eric Basmajian @ EPB Research
· Since the Fed has basically said they aren’t going to do anything until the Labor Market cracks, I thought it would be smart to look at the big picture of the labor market. The Fed continues to use words like “resilient” and “strong,” but if you talk to friends and neighbors, and recent college grads, you can gather that it’s only a good labor market “if you have a job.” If you don’t, it’s been a tough market for sure. So let’s dive in.
· From Eric’s report last week, “At first glance, the U.S. labor market seems robust—unemployment remains historically low, job growth continues, and the labor force participation rate is holding steady at elevated levels. But under the surface, something has changed. Over the past several years, the U.S. labor market, especially among the 25–to 54-year-old prime-age cohort, has been remarkably strong. Participation surged after the pandemic. Job quality improved, and both employment and hours worked hit new highs.”
· Let’s focus on two points.
o Prime-Age Labor Ratios: 25-54 year old population, known as the prime-age population, as this removes the effects of an aging populace and other demographic changes.
o Labor Quality: This refers to the proportion of the entire labor force that works full-time. “The full-time employment ratio is declining, which means a smaller share of the labor force is employed full-time. The ratio reached its highest level ever during the pandemic boom, as labor demand was intense; however, that has clearly shifted, and the signal is now clear: employers are reducing labor intensity.”
· In total, you can see that the labor market isn’t at peak cycle, but it’s not bottom either. Time will tell where these charts lead, but the Fed has basically said they are going to wait until the Labor Market cracks. If and when it does ultimately crack, it will be too late and they have to resort to massive cuts, rather than a slow glide down. They are stuck in a tough position that if they cut too soon, they are afraid of reigniting inflation, and if they wait too late we go into a Recession.
This Week’s Market Commentary:
- This week brings a flurry of important data releases that could shape market sentiment and policy outlooks. The most important will be Friday’s Personal Consumption Expenditures, the Fed’s preferred measure of inflation. Based on already received data, this should come in fairly tame and continue to head to 2%. If it weren’t for Tariffs, I think the Fed would have cut last week and we already have 2 Fed Governors talking about a cut in July.
- Tuesday: Home price appreciation data is set to be released.
- Monday, Wednesday, and Thursday: Watch for reports on May’s Existing Home Sales, New Home Sales, and Pending Home Sales, respectively.
- Thursday: In addition to Pending Sales, we’ll get the latest on weekly jobless claims and the revised Q1 GDP estimate—a closely watched update after earlier figures showed a 0.2% contraction.
- Friday: The week wraps with the release of May’s Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation.
This Week’s Reports:
- MON – Existing Home Sales
- TUES – Case-Shiller Home Price Index, FHFA House Price Index, 2-Year Note Auction, Conference Board Consumer Sentiment
- WED – · MBA Mortgage Applications, New Home Sales, 5-Year Note Auction
- THURS – Jobless Claims, Durable Goods Orders, GDP (final for Q1 2025), Pending Home Sales, 7-Year Note Auction
- FRI – PCE (Personal Consumption Expenditures)
