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Weekly Update 8/19/2022: Fed Minutes Continue Hawkish Tone

  • Walmart announces solid earnings
  • Deere lowers guidance
  • Housing results show signs of slowdown
  • Retail sales flat

Fed Thoughts

On Wednesday, the Federal Reserve released the minutes from its July 26-27 meeting. There were many interesting takeaways from the report. “Participants concurred that, in expeditiously raising the policy rate, the Committee was acting with resolve to lower inflation to 2 percent and anchor inflation expectations at levels consistent with that longer-run goal. Participants noted that the Committee’s credibility with regard to bringing inflation back to the 2 percent objective, together with its forceful policy actions and communications, had already contributed to a notable tightening of financial conditions that would likely help reduce inflation pressures by restraining aggregate demand,” the minutes said. Thus, Fed officials believe they are justified that their sharp hike in the benchmark federal funds rate has already had an effect on the economy at least anecdotally. At the July meeting, the Federal Open Market Committee unanimously voted to increase their rate by 75 basis points (0.75%). The minutes continued: “Participants reaffirmed their strong commitment to returning inflation to the Committee’s 2 percent objective. Participants agreed that a return of inflation to the 2 percent objective was necessary for sustaining a strong labor market. Participants remarked that it would likely take some time for inflation to move down to the Committee’s objective.” This suggests that they are far from finished in their march toward higher rates. Why should they stop? Rate hikes are working and they are nowhere near their objective. In fact, some members mentioned that the Fed’s credibility could be questioned if they did not follow through with their strategy until inflation was nearly squashed. Nevertheless, markets took much hope in the following sentences: “Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation. Some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent.” So, the Fed realizes that at some point they must put a stop to their hikes. Last week’s consumer and producer price data, which showed signs of peaking, contributed to the strong gains in the market since the July meeting. According to the futures market, traders are anticipating a rate cut by May of next year. It can be argued that markets are looking beyond the five meetings between now and next May which could see the fed funds rate rise to over 3.5% from the current range of 2.25%-2.50%. Odds of a 50 basis point and 75 basis point hike at the next meeting in September are about even. Not to be forgotten is the fact that the Fed will double the amount of balance sheet shrinkage in September—with a rundown of $60 billion in Treasurys and $35 billion in mortgage-backed securities. Next week, central bankers from around the world will convene in Jackson Hole, Wyoming for the annual Fed summer summit at which further policy thoughts could be communicated. Stay tuned.

Housing Data

The National Association of Home Buyers/Wells Fargo gauge for August showed that sentiment of homebuilders fell for an eighth consecutive month. The data point was below the most pessimistic estimate in a Bloomberg survey of economist and below the breakeven measure for the first time since May 2020. Rising mortgage rates are causing buyers to retreat. That is causing inventory to increase and a drop in new construction activity. All four regions posted a drop in sentiment and measures of future sales fell to the weakest level since May 2020. That mood has spilled into housing starts. The Department of Housing and Urban Development reported on Tuesday that construction starts fell in July to the slowest pace since early 2021. Residential starts fell to a 1.5 million annualized rate from a revised 1.6 million pace in June as transactions for both single-family and multifamily dwellings dwindled. Building permits, a proxy for future construction, fell 1.3%. Meanwhile, canceled deals rose to about 63,000 as buyers backed away from deals. That was equal to about 16% of properties that went into contract last month.

Existing home sales data for the month of July was released yesterday by the National Association of Realtors (NAR). Previously-owned homes comprise about 90% of all housing transactions making this information particularly important. For the sixth consecutive month, sales fell even though the median sales price declined from a record $413,800 in June to $403,800 last month. NAR said the last time sales declined for six consecutive months was between August 2013 and January 2014. Overall sales slid 5.9% in July to a seasonally adjusted annual rate of 4.81 million which was below the 4.86 million expected in a Bloomberg survey of economists. Though the median sales price declined from June of this year, it was still 10.8% higher than July of last year. According to Freddie Mac, a 30-year fixed rate mortgage was going for 5.13% this week which was down from recent weeks but still near multi-year highs. The Mortgage Bankers Association said on Wednesday that mortgage applications fell 2.3% last week from the preceding week. Clearly the Fed’s rate hike program is having an effect on the housing market as buyers take a step back given the new higher monthly expense for those who take out a loan and the improving but still limited supply of homes on the market.

Retail Sales

The Commerce Department reported that retail sales were flat in July which was a little behind consensus. Excluding autos and gas sales, the figure rose 0.7% versus the consensus expectation of a 0.4% rise. While retail sales does give a picture of what the consumer is currently focused on, it really amounts to a report card on consumer demand for merchandise. Data on personal income and spending presents a fuller picture of the financial health of the average American. Nevertheless, data showed that department stores are eager to clear out merchandise after being caught with too much in the late spring and early summer when they thought pandemic-era buying patterns would continue. July and August data are critical because figures give a picture of the back-to-school season which for the first time in two years will be somewhat normal for most of the children in the country. Overall the results were mixed with electronics up 0.4% (vs. -0.1% prior) but sporting goods weaker by 0.1% (vs. 0.6% prior) and apparel lower by 0.6% (vs. 0.9% prior). Food prices were the big mover, rising by 10.9% last month for the biggest jump since 1979. Next month’s data will give a complete picture in addition to the earnings reports we are hearing from various consumer firms (see: Walmart below and Dick’s Sporting Goods reports next week).

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