Housing on a shaky foundation

Stocks slipped yesterday amongst continued concerns that the Fed is getting ready to hoodwink stocks with higher-than-expected rate hikes. Economic data continues to point to a slowdown in economic activity, is the Fed even paying attention?

When it’s time to relax. We live in a digital world where the basis of EVERYTHING is 1’s and 0’s. No, really, trust me, I have a bit of experience with this. Digital signals make it easy to transfer more data through wires, the air, or fiber. Today, data is everything. Take television signals as an example. If you are of a certain age, you will fondly recall the rabbit ear antenna on top of your Zenith or Magnavox black and white TV. You would turn the knob to one of the 5 or 6 active channels, but you could not just sit back and kick up your feet just yet. You had to adjust those two antennae just right so that the picture was somewhat clear of snow and the sound clear of that fuzzy hissing sound. You could never get it quite right. Some folks even resorted to adding some tin-now-aluminum foil to the tips, though there was no scientific evidence that the foil helped in any way…don’t tell them. In any case, the world of science has eliminated that problem by digitizing television, signals reducing it to those ones and zeros I referred to before. With that, there is less room for your now-digital TV to get lost in translation. It is either a 1 or 0. Either you get the signal, or you don’t. No fuzz, no hiss, no ghost patterns, no snow…no need for foil or wire hangers. It’s all clear. Of course, I am over-simplifying it, but you get the picture (dad humor). Today, it’s all about data, and we expect that data to be clear of noise. But for some strange reason, the stock market didn’t get the memo.

If you have been paying close attention, you would note that the recent theme of my daily notes is clear, if not somewhat repetitive. You see, I want to make sure that you get it as clearly as possible. We know that the Fed is going to raise rates. They have to, in order to fight inflation. We also know that the economy is on its back foot, the numbers have been clear. The Fed must strike that perfect balance where interest rates, which are under its control, are restrictive enough to cause us all to slow down spending, but not too much to cause the economy to stall into a deadly tailspin, which is not under its control. Based on futures we have a good idea that the market expects Fed funds to end the year at around 3.5%, which is about +1.25 percentage points higher than we are today, somewhere between 2.25% and 2.5%. Today, we are at what is considered the neutral rate, so anything higher would be considered, by economists and the Fed, to be restrictive. Therefore, we know that the Fed will get into that restrictive zone by the end of the year. So, when a Fed official says that inflation is unacceptable and that rates must be higher to tackle inflation, are we actually learning something new…gaining more data? We know that the Fed officials say that in hopes that consumers will pull back on their spending simply by observing their aggressive body language. Combine that with rates, which have already been raised more aggressively than they have been since the 1980s (before flat screen TVs), and consumers and corporations should be pulling back. AND recent data suggests that we are!

GDP growth declined in Q2 for a second straight quarter principally due to a pullback in business investment. Noted. The majority of retailers have lowered their full year sales and earnings guidance due to reduced consumer demand. By at least one measure, consumer confidence is around all-time lows. Noted. Yesterday’s flash PMIs (Purchasing Managers Indexes) missed expectations and fell from last month’s levels on both manufacturing and services. Yesterday’s New Home Sales numbers confirmed what we probably already knew: the housing market is slowing down significantly. Yesterday’s number was the lowest since 2015. Talk about 0 to 60 and 60 to 0 in 2 years! Noted, of course. All of this is due to rate hikes and Fed body language, AND THAT IS THE INTENTION. Now, we just need to see prices come down a bit, and there is evidence, albeit scant at this point, that prices are at or near their peak. The last Consumer Price Index / CPI from earlier this month came in slightly lower than the previous month, and economists are expecting Friday’s PCE Deflator to confirm that. We also know that the US Dollar is surging because of the Fed’s aggressive stance and higher bond yields. The stronger Dollar makes the cost of foreign-purchased goods cheaper, which should also chip into inflation. Remember those retailers we spoke about earlier? Well, they are flush with excess inventory, and the only way to move it is…you guessed it, by lowering prices. To be clear, they haven’t done it yet, but it is expected by analysts as the season changes.

This week’s markets are on edge. There is a lot of focus on the Jackson Hole Symposium. That banker’s confab has been going on since 1978, but this year is probably the first time you even heard of it. Everyone wants to know if the Fed is going to ease up on its current hiking direction. The majority of Fed speakers in the past month have given no indication that the Fed will let up and some even speak of speeding up the hikes. That is already factored into the market. The buck stops with the Fed Boss, Jerome Powell who will speak on Friday, which is the focus of the equity markets this week. The question is, do we really want to know what he will say? Don’t we know already? I had an uncle who would literally stand with his hands on the rabbit ear antenna for the entirety of a football game, always seeking to get it just right. He should have realized there was no “just right” and kicked back to watch the game.

YESTERDAY’S MARKETS

Stocks wavered yesterday unsure of how to interpret weak economic numbers. The S&P500 Index fell by -0.22%, the Dow Jones Industrial Average traded lower by -0.47%, the Nasdaq Composite Index was unchanged, and the Russell 2000 Index gained +0.18%. Bonds declined and 10-year Treasury Note yields climbed by +3 basis points to 3.04%. Cryptos added +3.98% and Bitcoin traded higher by +1.67%.

NXT UP

• Durable Goods Orders (July) are expected to have grown by +0.80% after climbing by +2.0% in June.
• Pending Home Sales (July) may have declined by -2.5% after falling by -8.6% in June.
• Earnings after the closing bell: Salesforce.com, Snowflake, Splunk, NVIDIA, and Williams-Sonoma.