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Weekly Update 10/21/2022: Earnings Season Picks Up Steam

  • U.K. Prime Minister Truss resigns
  • Existing home sales decline again
  • Jobless claims fall unexpectedly
  • Earnings deluge begins...read on for more!

International News

In a move that cannot be considered surprising at this point, U.K. Prime Minister Liz Truss said she would resign from the position. She is set to be the shortest in British history, eclipsing that of George Canning, a Tory leader who died in office after 118 days as prime minister in 1827. His successor, Frederick John Robinson, resigned after 144 days in office, the shortest term for a prime minister who didn’t die in office until Ms. Truss. A leadership election will be held within the next week to find her replacement. The new leader of the Conservative Party will automatically become prime minister. “I recognize that given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party,” she said standing outside Downing Street on Thursday. The move comes only months after previous prime minister Boris Johnson was forced out of office following a series of scandals. “This whole affair is inexcusable. It is a pitiful reflection on the Conservative parliamentary party at every level, and it reflects very badly on the government of the day,” said Charles Walker, a Tory lawmaker for 17 years. “I hope all those people who put Liz Truss in No. 10 [Downing Street], I hope it was worth it…Because the damage they have done to our party is extraordinary.”

The resignation was the culmination of an extraordinary six weeks in Britain. Ms. Truss and her chancellor of the exchequer Kwasi Kwarteng announced a plan to borrow billions of pounds to fund the nation’s largest tax cuts since the 1970s in an effort to boost economic growth. The plan also included an energy subsidy for households which also did not go over well with the markets. Such moves would have exacerbated the inflationary forces at work in the country which the Bank of England was trying to combat with rate hikes. Ms. Truss’s popularity immediately nosedived as the U.K. currency cratered causing the Bank of England to intervene to stabilize the government-debt market. Mr. Kwarteng was fired and a handful of tax cuts were reversed only to be completely repealed by Mr. Kwarteng’s successor, Jeremy Hunt. Markets stabilized but the political chaos only worsened. Fearing that they had no chance of winning an election in 2024 with Ms. Truss at the helm, she knew the only solution was to step away weighed down by the lowest public approval ratings of any prime minister since the early 1990s. “An arsonist is still an arsonist even if he runs back into a building with a bucket of water,” said Rachel Reeves, the opposition Labour Party’s shadow chancellor.

While serving as fascinating political theater, the effects on these shores was limited once the bond markets were settled by the Bank of England. There is still a chance that future events could play a hand in domestic economic matters, but for now, it merely remains an amusing though ultimately sad sideshow.

Housing Data

The quandary the British government had to face—namely keeping some sort of growth as inflation rages and interest rates rise—is the same problem the U.S. must tackle as well. Interest rate sectors like the housing market have felt the brunt of this battle. Existing home sales fell for an eighth consecutive month in September according to data from the National Association of Realtors (NAR) yesterday. This is the longest stretch of declines since 2007 when the housing market’s collapse at that time ignited the Great Recession. The difference this time around is that the nation’s largest banks are not undercapitalized and overleveraged like they were in 2007 and 2008. Another important point is the supply of homes. “Despite weaker sales, multiple offers are still occurring with more than a quarter of homes selling above list price due to limited inventory,” said Lawrence Yun, NAR’s chief economist. “The current lack of supply underscores the vast contrast with the previous major market downturn from 2008 to 2010, when inventory levels were four times higher than they are today.” Additionally, there are not as many securitized instruments backing those loans which exacerbated the turmoil back then. The median selling price rose 8.4% from a year earlier to $384,800. Nevertheless, that was the lowest rise since March as 70% of the properties remained on the market for less than a month in September compared to 81% in August. On average properties are remaining on the market for an average of 19 days, up from 16 days in the prior month.

Separate data out earlier in the week showed builders are pulling back as well. Beginning construction of single-family homes fell 16% to slowest pace since April 2020 during the depths of the pandemic. Residential starts fell 8.1% last month to a 1.4 million annualized rate according to data from the U.S. Census Bureau and Department of Housing and Urban Development. On a brighter note, applications to build, a proxy for future construction, rose last month led by multifamily properties.

Labor Market

Construction payrolls are at their highest since 2007 as a result of consistent hiring which has eased some of the labor constraints for builders. Initial unemployment claims fell 12,000 to 214,000 according to the Labor Department in the week ended October 15 which is the opposite direction of what the Fed is looking for where the expectation was for 233,000 new applications. The drop is suggesting that even after the aggressive moves by the Fed since spring, the employment market remains robust. Anecdotally, some industries are laying off workers or freezing hiring. According to outplacement firm Challenger, Gray and Christmas said there were 29,989 job cuts in September. However, joblessness has not spread as quickly as some might have hoped in order to get the Fed to ease off their hiking stance, and that figure is a drop in the bucket in a total labor market of about 153 million. Historically, claims have tended to jump above 400,000 at the outset of recessions which is clearly not happening yet. Plus, given the slack in the labor market, even those who do get laid off recently are not without a paycheck for long. The Federal Open Market Committee will be meeting and deciding their next steps on November 2 which is two days before the next monthly nonfarm payroll information is released. However, that information is always backward-looking, in fact, the data for that report has already been collected by now. The Fed is likely to have all the info they need to make a decision when the time comes. According to futures markets, traders are pricing in another 75 basis point (0.75%) bump next month followed by another 50 basis points in December. That would push the upper end of the federal funds range to 4.50%. At the start of March, that level was 0.25%. The two questions still vexing the market are how high with the Fed go and how long will they stay at that peak level? Stay tuned!

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