- IBM reports strong back-to-back results
- Anthem ups guidance
- Omnicom posts 12% organic topline growth
- AT&T returns to its roots for solid quarter
- Housing data has mixed takeaways
This week investors were focused on companies as earnings season began to ramp up. Nonetheless, there were a few economic data points to note in the housing industry. According to the Commerce Department, new U.S. home construction rose unexpectedly last month to the highest level since 2006. Tuesday’s release saw housing starts climb 0.3% in March to a 1.8 million annualized rate from an upwardly revised February figure. The impetus behind the rise was builders seeking to replenish housing inventory. Multifamily starts (i.e., apartment buildings and condominiums) rose to 593,000 in March. Meanwhile, builder sentiment dropped to a seven-month low in April according to the National Association of Home Builders (NAHB)/Wells Fargo info released on Monday. “The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” said Robert Diez, chief economist at the NAHB.
Meanwhile sales of previously owned homes fell in March to the lowest since June 2020. The National Association of Realtors (NAR) reported that existing home sales were 5.8 million annualized for the last month which was in-line with the consensus in a survey of economists by Bloomberg. Sharply rising mortgage rates and inflationary forces are combining with a lack of inventory to lessen demand. Mortgage rates are over 5% for the first time since 2018 adding to the overall costs of financing a home. The NAR reported that the number of homes for sale increased in March from February but were still 9.5% lower than a year ago. At the current pace of sales, it would take two months to clear all the inventory. The rule of thumb is that anything under five months is considered a sellers’ market. The median sales price rose to a record $375,300, up 15% from March of 2021 according to NAR data. The high sticker prices are especially detrimental for first-time buyers who accounted for 30% of sales last month, up from the previous month but still low on a historical basis. Investors are about 18% of the market and are winning bids with all-cash offers which comprised 28% of all transactions. They are helping to squeeze out owner-occupied buyers as they seek an asset class to put cash to work that is not as volatile as the equity and bond markets.
On the labor front, initial jobless claims fell by 2,000 to 184,000 in the week ended April 16 according to the Labor Department. Continuing claims for state benefits fell to 1.42 million in the week ended April 9, the lowest since 1970. These numbers suggest that the next unemployment report, due in two weeks, could see the jobless rate drop to 3.5%, down from March’s 3.6% rate and close to the 3.4% rate reached in 1953. At an International Monetary Fund-hosted panel yesterday in Washington, D.C., Fed Chairman Jerome Powell said, “I would say that 50 basis points will be on the table for the May meeting.” He added that demand for workers is “too hot—you know, it is unsustainably hot.” Powell also mentioned “there’s something in the idea of front-end loading” suggesting that a 50 basis point move next month will not be the last such hike markets see this year.
Fed Funds Future Market
The Fed Funds future market is pricing in a July implied rate of 1.922% as of this morning. That intimates that by the end of the meeting that month, the range for overnight lending of excess funds between large banks will be in the range of 1.75%-2.00%. The current rate is 0.25%-0.50%. So, to get there, the fed will have to boost its target by 1.50% and fits with a 0.50% boost at the May, June and July meetings and fulfills the “front-end loading” Powell was strongly hinting. This says nothing of the quantitative tightening (QT) steps involved in shrinking the $9 trillion Fed balance sheet starting this spring. Rate moves and QT are blunt tools the Fed has at its disposal to try to settle price levels that have risen faster and stayed higher than originally anticipated. The key question is whether these methods will be able to push rates to a level that are neither too loose nor too restrictive and provide a “soft landing” for the economy as it cools down but doesn’t come to a halt. The volatility we have seen this year is directly related to if the Fed can pull this off. Stay tuned!
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