Market Wrap: 7/15

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7/15 - 7/19

University of Michigan Consumer Sentiment

The University of Michigan has released their Consumer Sentiment Index for the month of July, showing that consumer confidence fell once again. The index fell from 68.2 to 66, which is the fourth consecutive decline and an 8-month low.

Current conditions fell 1.8 points, while the outlook fell 2.4 points. One-year inflation expectation dropped from 3% to 2.9% and the employment picture remained weak. Those that expect higher incomes fell to the lowest level in over a decade, while spending intentions across the board were lower.

Powell Speech at Economic Club of Washington DC

Fed Chair Jerome Powell spoke last week at the Economic Club of Washington DC. While Powell did not say anything groundbreakingly new, he sounded more confident on inflation heading to their goal.

We know that the Fed is not going to wait for inflation to get to 2% before cutting rates, but rather they are going to cut when they are confident that inflation is heading to their 2% goal…And Powell said yesterday that the last three inflation readings have given him more confidence.

Powell also brought up the employment side of their mandate and how he is watching that closely - If there is unexpected weakness in the labor market, that could lead to a cut as well. He also talked about the economy slowing and likely growing at 1.5%, but almost dismissed a hard landing or recession, saying that it’s not the most likely scenario.

When asked what keeps him up at night, he said it’s cutting too soon and inflation coming back vs cutting too late and causing recession.

Bottom line – he sounded more dovish and like someone who wants to cut rates. He seemed more confident with the inflation data than we have heard previously.

We also heard from SF Fed President Mary Daly, who is a voting member this year. She said that confidence is growing that inflation is heading to 2%, but that she needs a lot more information before making any real determination.

But remember that next week we are going to be getting some very important news, including the QCEW Q4 Job revisions data and June Core PCE reading, which is expected to fall from 2.6% to 2.4%. If we see much weaker than expected job growth confirmed in Q4 and 2.4% core inflation, does that constitute “a lot more information”?

Currently the market probability of a rate cut are as follows: 7% chance of 25bp cut in July, 100% chance of 25bp Cut in September and 7% chance of 50bp cut in October. The market is also pricing in cuts at the November and December meeting.

Retail Sales

Retails Sales for the month of June were unchanged at 0%, which was weak and in line with expectations. However, the May reading was revised higher from 0.1% to 0.3% and makes today’s report stronger. Additionally, the headline reading was dragged down by weak automobile and gasoline sales. The Core reading, which gets plugged into GDP, rose 0.9%, which was much stronger than estimates and will likely lead to some higher GDP revisions.

Peter Boockvar, provided some color on the consumer:

“Bottom line, I’ve gone through countless consumer touching earnings conference calls over the past few months, and provided you with all that I found important, and the only portion of consumer spend that is doing well comes from the higher end. The lower to middle income consumer is stretched, extremely value conscious and focused on needs and not wants. I’m thus not reading today’s data as evidence of a strong consumer.”

Cass Freight

In contrast to the Retail Sales report, we saw a weak Cass Freight June release. Goods need to be shipped across the US to be sold, and the shipments component of Cass Freight’s report fell 1.8% in June to a 4-year low. This shows less economic activity and a slowing economy.

Our good friend, Dr. Lacy Hunt, also believes the economy is slowing. In his report yesterday, he stated, “Cyclical economic deterioration and constrictive monetary and fiscal factors point to a weaker economy, less inflation, and lower Treasury bond yields.” We agree and certainly welcome lower yields.

Fed Commentary

We heard from Fed Governor Waller and NY Fed President Williams today, both of which are influential voting members.

Fed Governor Waller said that the recent data is consistent with achieving a soft landing, meaning getting inflation to their target without causing a recession. He also believes the Fed is getting closer to a rate cut, but seems to be in the September camp.

NY Fed President Williams said that rate cuts are going to be warranted in the coming months, which sounds like July is too soon but September is likely. We have been several Fed members now gaining more confidence on inflation and in favor of a September rate cut.

NAHB Housing Market Index

The July NAHB Housing Market Index, which measures builder confidence, fell one point to 42, which is the lowest level since December and is in contraction below 50. Looking at the internals:

Current Sales: fell 1 point to 47

Future Expectations: rose 1 point to 48

Buyer Traffic: fell 1 point to 27

While builders are still feeling pessimistic, future expectations did rise, as they are seeing the light at the end of the tunnel with rates after the recent data and likelihood of a September cut.

Housing Starts and Permits

Housing Starts and Permits rose from 4-years lows in June, but it was all in multi-family. Single family Permits and Starts fell, signaling that we are going to continue to have tight inventory for years to come. Permits are at an annualized rate of 1.45M, which is a low number and compares with household formations on track for 2M. There is a big disparity between these numbers, showing that there is much more demand (formations) than supply (permits), which should continue to be supportive of home prices.

The increase in multi-family coincides with the NAHB rise in future expectations, as builders are starting to feel better about the future because they believe rates will moderate. With the record amount of multi-family projects happening right now and the bump up in this report, it should continue to cause rental increases to moderate.

Mortgage Applications

Purchase applications fell 3% last week and are now down 14% year over year. Refinance volume rose 15% last week, albeit from very low levels. Refinances are now up 37% year over year and made up 39% of total applications – Make sure you are doing cash out refinances, otherwise you are likely missing a large portion of the business being done today.

Interest rates fell from 7% to 6 7/8% and are now at the same level they were at this time last year.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, rose 20,000 to 243,000. This is the highest level in 11 months and points to more people getting let go and then filing for benefits. The bump higher after last week’s lower reading also confirms that the BLS does not properly adjust for holidays, as the previous report was low due to July 4.

Today’s report also has added significance because it is the “sample week” that includes the twelfth of the month, which the BLS uses in their jobs report estimates. From this one component, we would expect some weaker job growth.

Continuing Claims was also released and measures Individuals continuing to receive benefits after their initial claim. This metric can be used to gauge how much companies are hiring – If we see more continuing claims, you can infer that it’s harder to find a job once you are let go.

Continuing Claims rose 20,000 to 1.867M, which is the highest level since November 2021. We continue to see signs that the labor market is weakening.

CoreLogic Rental Index

CoreLogic released their Rental Report for the month of April, showing that blended rents are up 3.2% year over year, up from 3% in the previous report. This is the highest level in almost a year, but is still trending much lower than the rental component of the inflation reports we receive, which is running at 5.2%. This is only for single family rents, but compares to the Cleveland Fed’s rent index showing an increase of 4% and Truflation showing rents down 0.36% year over year. The methodologies are a bit different, but the theme in most reports remains the same – Rental prices and overall shelter is falling.

So long as last week’s CPI report was not an anomaly, it appears that we are starting to see shelter catch up and begin to reflect the lower shelter costs we have been seeing in the market. Because Shelter makes up 45.5% of core CPI and 21% of core PCE, inflation often goes the way of shelter…And we should continue to see lower shelter readings, leading to lower inflation. The PCE inflation report is due for release next Friday, where we will look for more confirmation of lower shelter costs.