Market Wrap: 8/26

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8/26 - 8/30

2019 Comparison

Durable Goods Orders

The Fed is historically tight right now, with the Fed Funds Rate at 5.25% to 5.50%. We know the Fed is going to start cutting on September 18, but they are behind the curve and have a lot of room to cut rates. Let’s take a look at some of the economic readings today vs pre-pandemic in 2019 – There is not much in common and the Fed is clearly overly restrictive.

2019 vs Today

1. Core PCE: 1.8% vs 2.6%

2. Unemployment Rate: 3.6% vs 4.3%

3. Job Openings to Unemployment Ratio: 1.24% vs 1.2%

4. Hiring Rate: 3.9% vs 3.4%

5. Fed Funds Rate: 2% vs 5.375%

6. 10-year Treasury: 2.8% to 1.9% vs 3.80%

7. 30-year Fixed Mortgage Rate: 4% vs 6.5%

Inflation is higher today but is on the way down. Notably, labor is much weaker across the board, yet the Fed Funds Rate is much higher. 10-year yields are 1-2% higher than 2019, while Mortgage Rates are 2.5% higher today…And we think yields and rates will continue to move lower, albeit not in a straight line and over time.

Durable Goods Orders in July rose almost 10%, which appeared to be much stronger than market estimates of +5%. But this report is heavily influenced by aircraft orders, and when stripping out transportation, the index fell 0.2%...which was worse than estimates of -0.1%. There was also a big downward revision to June, making this report even weaker.

Core Durable Goods Orders fell by 0.1%, which was weaker than estimates of a flat reading, but there was a positive revision to the previous report. Year over year, capital spending has been weak, up only 1.2% and pointing to a slowdown in the economy.

Also of note, the shipments of those Core Goods, gets plugged into GDP, fell 0.4%. All else equal, this will trim Q2 GDP estimates when revised next.

Austin Goolsbee Comments

Chicago Fed President, Austin Goolsbee, has been one of the most dovish Fed members for a while now, expressing that the Fed’s monetary policy os overly tight.

He recently said that you only want to be this tight on purpose if you're trying to cool an overheating economy, and this is not what overheating looks like. Goolsbee also explained that the Fed is the tightest they have been in this cycle, even though they stopped hiking rates last July, because inflation has continued to cool while the Fed Funds Rate has remained at roughly 5.375%.

He also mentioned that the labor market is cooling by all measures. When asked about a 25bp or 50bp cut at the September 18 meeting, he was noncommittal and stressed that it doesn’t matter which they choose, what is more important is the longer term view of policy. Meaning, what’s more important is that the Fed starts cutting and continues to do so, as this will be a process and a series of rate cuts.

We believe that the Fed would like to go 25bp, but if the September 6 Jobs Report, which is for the month of August, shows more weakness and the unemployment rate rises again, the Fed will do 50bp.

Also of note, the shipments of those Core Goods, gets plugged into GDP, fell 0.4%. All else equal, this will trim Q2 GDP estimates when revised next.

New Appreciation Data

Home price gains continue – The Case Shiller Home Price Index, which is the “gold standard” for appreciation, showed that home prices rose 0.2% in June, rising to another all-time high. The 0.2% gain is the seasonally adjusted number, which takes into account the typically stronger appreciation seen during this time of the year. The non-seasonally adjusted figure rose 0.5% in the month alone.

Prices are now up 5.4% year over year, down from 5.9% in the previous report, but this was due to a high comparison from last year that was replaced.

The 10 and 20-city indices were higher than the nationwide figures, showing that they are outperforming. Additionally, lower priced homes appreciated at a faster rate than the overall market.

The FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Different than Case Shiller, it does not include cash buyers or jumbo loans. The FHFA reported that home prices fell 0.1% in June and are up 5.1% year over year, which is down from 5.7% in the previous report. The biggest reason for the deceleration year over year is once again due to higher readings this time last year that were replaced by lower figures.

Despite the negative media, home prices continue to move higher and provide a significant wealth creation opportunity.

Rent Concessions

There has been a flood of new multi-family apartments that have been built or are in the pipeline to be completed. As a result, the vacancy rate has moved up to one of the highest levels we have seen in four years at 6.7%.

We are now seeing landlords offer concessions or incentives for new leases, renewal leases, and just paying rent on time. The concessions can include a month or two of free rent or a discount on utilities, as well as monthly rewards. Zillow reports that 33% of of their rental listings had at least one concession, up from 25% last year. Zillow’s reading is on new rents, but WSJ reports that about 5% of renters in the US are getting rewards or paying rent on time and signing or renewing leases.

These incentives are not being captured by the CPI and PCE inflation reports and is just another reason that they are overstating shelter inflation. The higher vacancy rate and incentives to fill those rentals speaks to a lack of demand and loss in pricing power…which should be deflationary. We anticipate the shelter readings within CPI and PCE to continue to catch up and start reflecting some of the softeners we are seeing. Bottom line – this should continue to help inflation come down.

Mortgage Application Data

The MBA (Mortgage Bankers Association) reported that interest rates remained just under 6.5% last week and were roughly 0.875% lower than this time last year. Even though rates have been on the decline, Purchase volume only rose 1% last week and is still down 9% year over year.

There are many in the media trying to make a point that the drop in rates has not helped the purchase market, showing weakness in housing. However, they are not contemplating that it takes time. Buyers need to be convinced that rates will stay lower, then it takes time to look for homes in this tough inventory environment, and once they put in an application there are lags before it shows up in the numbers. Purchases will be impacted positively by the drop in rates, but it may not show up for weeks or months to come.

Refinance activity was flat, but is still up a strong 85% compared to last year. Refinances made up almost 47% of total application volume – Make sure you are organizing your database, setting a strike price with customers, and are ready to take advantage as rates continue to decline as the window of opportunity may be brief.

Job Revision Data

There has been a lot of talk that the -818,000 in BLS Job revisions from March 2023 to March 2024 was overstated because during that time there were immigrant workers who were working “under the table” and not captured. While this may be true, it certainly did not make up for all of the revision and the BLS still grossly overstated job growth.

But if you were to count those workers, even though there is not hard data to support it, you would also have to count all of the immigrants in the unemployed ranks and labor force. This would cause the unemployment rate to be MUCH higher. Additionally, the undocumented workers are getting paid less than legal workers on the books and that also means that average hourly and weekly earnings are overstated and there is much less wage pressured inflation than what has been reported.

Apartment List National Rent Report

Pending Home Sales

Pending Home Sales, which measures signed contracts on existing homes, fell 5.5% in July, which was weaker than estimates of a flat reading. On a year over year basis, sales are down 8.5%.

NAR Chief Economist Lawrence Yun said, "Current lower, falling mortgage rates will no doubt bring buyers into market."

Bottom Line – signed contracts on existing homes were soft. It'll take time for the impact of lower rates to translate into buyers shopping, finding a home, negotiating, and eventually signing a contract. We expect these numbers to improve in time.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 2,000 to 231,000.

Continuing Claims, which measures Individuals continuing to receive benefits after their initial claim, increased 13,000 to 1.868M, near the highest level since November of 2021. This continues to show weakness in the labor market.

The Apartment List National Rent Report for August showed that new rents fell 0.1%. Things are starting to decelerate as they normally do during this time of year, as it was 0.4% in June and higher previous to that. Year over year, new rents are down 0.7%. Year over year rents have been negative since last August.

Based on seasonal trends, we should continue to see rental prices continue to decelerate on a month over month basis, which will help inflation move lower.

Something that may continue to keep new rental increases lower is the higher national vacancy rate at 6.7%, which is the highest level since August 2020 and should continue to remain elevated with all of the multifamily new construction coming to market.

Q2 GDP (Second Reading)

The second reading on Q2 GDP showed that the US economy grew by 3%, which was stronger than the 2.8% expected and previous quarter reading of 1.4%. The economy grew faster than initially thought amid strong consumer spending.

Within the GDP report there is also a quarterly reading on PCE prices, ahead of tomorrow’s monthly reading, which is more real time and important. The headline reading fell from 2.6% to 2.5%.

The core reading fell from 2.9% to 2.8%, which is also an improvement and was better than the 2.9% expectations.

PCE (Personal Consumption Expenditures)

Personal Consumption Expenditures (PCE) showed that Headline or all-in inflation rose 0.155% in July, which was rounded in the media to 0.2%, which was slightly below the 0.2% expected. Year over year inflation remained at 2.5%, which was a little better than the 2.6% anticipated.

The core rate, which strips out food and energy costs and is the main focus of the Fed, rose 0.161%, which was also rounded to 0.2%, which was slightly cooler than the 0.2% expected. Year over year, core inflation remained at 2.6% (2.62% precisely), but some estimates were looking for this to rise to 2.7%.

The monthly core reading was very good at 0.161%, and when annualized, is under the Fed’s 2% target at 1.93%. The last three monthly readings were also all very tame, and when annualizing the last three month pace, it’s under the Fed’s target at 1.7%.

Bottom line – Inflation is moderating and is heading to the Fed’s target. Despite good monthly progress, year over year progress has been difficult because of the low replacement values from last year. August from last year is very low, but we should be able to make good progress when we get the data for September, as the replacement is a bit higher. The fourth quarter will be tough, but Q1 of 2025 things get easier and we feel there is a good chance the Fed hits the 2% inflation target by then.

Looking at the components, Shelter is still the largest contributor to the inflation readings, however, the lag from this reading is keeping Core PCE artificially high. Shelter rose 0.39% in July and contributed 0.07% to the monthly reading of 0.161%, which was 43% of the rise. Year over year shelter is up 5.27% within this report, and it’s contributing 0.93%, which is 35% of the total. But shelter is still lagging and overstated. Using real-time readings around 3% shows that Core PCE is being overstated by 0.4%, and when caught up, Core PCE would be at 2.22%.

The other component that added about 26% of the monthly reading was Financial Services. Looking at all of the components, many were negative. Overall, a lot of components are moderating or near the flatline, especially the goods sector.

Also within the report were figures on consumer incomes, spending, and their savings rate. Incomes rose by 0.3%, which was in line with estimates. Consumer spending rose 0.5%, which was also in line with estimates. Consumers continue to spend more than they take in, which is causing the savings rate to fall significantly.

The savings rate was around 8% pre-pandemic, was cut in half to 4% in January of this year, but has since plummeted to 2.9% in July. This shows that consumers are under duress and there is only so much savings that consumers have to deplete, so this should eventually lead to lower spending and a slowdown in the economy.