Morning Report: Trump continues to negotiate with Korea and Japan on tariffs.

Vital Statistics:

Stocks are higher this morning despite Trump imposing tariffs on South Korea and Japan. Bonds and MBS are down.

The Trump Administration gave Korea and Japan until August 1 to agree to new trade terms. The markets seem to be taking this in stride, thinking there must be some wiggle room to get a deal done. That said, the downside of this will be that it gives the Fed more time to drag its feet on lowering interest rates.

The main impact will be in autos.

The national mortgage delinquency rate fell by 2 basis points to 3.2% in May, although it is up 16 basis points from a year ago. This is according to ICE McDash data. Student loan debt collections are re-starting, and this will impact FHA borrowers. The McDash data for FHA DQs doesn't take into account the entire universe of FHA borrowers, so the DQs there might be somewhat understated.

Given the affordability struggles, we are seeing higher use of adjustable rate mortgages and temporary buydowns. DTIs remain stretched.

Small business optimism declined again in June, and is sitting just above its 51 year average, according to the NFIB. Small business is dealing with declining sales and inventory (a net 5% reported lower sales) and inventory levels are declining as tariff uncertainty weighs. That said, sales improved to a negative 8%, which was the highest in a couple of years. The 8 point increase was the biggest in about 4 years. So while some of the readings are negative, the sales number is a good sign.

Labor quality remains an issue, primarily in the skilled trades, while white collar jobs continue to see lower job openings. A net 29% reported raising average selling prices. About 11% of small business owners reported that inflation was their single biggest problem, which was the lowest since 2021. Inflation is highest in finance, wholesale, retail, and construction.

The Uncertainty Index remains at elevated levels, with politics
and more politics dominating the news. Real spending on
investment is falling and spending plans remain depressed.
Investments today impact our ability to produce more
“tomorrow.” Job creation has been wobbling downward and will
continue to do so.

Inflation remains stubbornly above the Federal Reserve’s target,
therefore the policy rate remains over 4 percent with the
possibility of cuts getting pushed down the road. The President
wants a lower rate, and sometime this fall, market conditions will
likely justify a rate cut by the FOMC. Lower mortgage rates would
provide some support to a slowing housing market and reduce
borrowing costs for small businesses, but supply remains the
bigger problem. Owners face high labor costs with many
continuing to raise compensation, a cost that will be passed on
in higher selling prices, not helpful for the inflation fight.

Consumer spending will be the key to growth over the next 12
months. Sentiment is in the tank, consumers are sharply divided
on their political affiliation. Democrats are depressed,
Republicans jubilant. Just how this will shape their spending is
less clear. As Uncertainty is resolved, the outlook will become
clearer.

Multifamily construction has skyrocketed in the past few years, with completions in 2024 hitting a 24 year high. High density buildings (i.e. 50+ units) continue to be the driver.

Geographically, these are concentrated primarily in the South (48%), the West (27%), while the Midwest and Northeast account for the rest.