The Market Today

Home Sales Hit by Rising Rates and Declining Purchasing Power


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Inch Lower, Continuing Claims Lowest Since 1968: Initial jobless claims for the week ending April 16 declined 2k to 184k.  This marks the second week with elevated initial claims relative to previous weeks this year.  As highlighted in last week’s report, any tick higher in initial claims is likely to warrant attention given the recent tightening of financial conditions.  Nonetheless, the results would be the fifth-lowest weekly total since 1970 if not for five even-lower weekly results earlier this year.  Continuing jobless claims for the week ending April 9 fell 58k to 1.42m, to their lowest level since 1968.

Philly Fed Index Declines on New Orders but Delivery Times Plunge: The Philadelphia Fed’s April report on regional manufacturing activity declined more than expected, down from 27.4 to 17.6 on weaker new orders, and shipments.  The employment index increased 2.5 points to a very strong 41.4.  On a positive note for the supply chain, the delivery times index plunged 21.8 points to 17.9, the lowest level since prior to the final round of stimulus transfers.

Chair Powell, Leading Index: Fed Chair Powell is scheduled to speak with ECB President Lagarde on an IMF panel on the global economy (12:00 noon CT).  The March Leading Index is expected to increase 0.3% (9:00 a.m.).


OTHER ECONOMIC NEWS

Existing Home Sales Hit Slowest Pace Since June 2020 As Prices Set Another Record: Existing home sales declined 2.7% in March following an 8.6% slide in February, pushing monthly sales down to 5.77 million annualized units, in line with expectations and the slowest rate of activity since June 2020. Activity was flat in the West but declined again across the three remaining geographic regions. The housing sector has become an area of concern as mortgage rates have surged, creating additional affordability challenges for buyers already faced with record prices. The median price for existing homes sold in March jumped to $375k, marking a new all-time high and a 15.0% increase from a year ago. An average of 30-year mortgage rate estimates from the Mortgage Bankers Association and Freddie Mac rose from around 4.00% at the end of February to roughly 4.80% by the end of March. The NAR’s chief economist said, “The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power.”

Fed Beige Books Echoes Inflation Concerns: The Federal Reserve’s latest Beige Book, covering the period from February 19 through April 11, indicated that economic activity and employment both increased at a moderate pace and that inflation pressures remained strong. Consumer spending on services improved as the Omicron wave dissipated and solid manufacturing activity continued to be challenged by supply-side disruptions. The Fed said, “Outlooks for future growth were clouded by the uncertainty created by recent geopolitical developments and rising prices.” Imbalances between the demand for and supply of labor persisted, although several regions saw some improvement in worker availability. “Many firms reported significant turnover as workers left for higher wages and more flexible job schedules,” the Fed noted. Strong wage growth was attributed to both competition for workers and broader inflationary pressures. The Fed said, “firms [continued] to pass swiftly rising input costs through to customers.” The war in Ukraine (for prices) and the lockdowns in China (for supply chains) were cited as disruptive forces and “most Districts expected inflationary pressures to continue over the coming months.”

Fed’s Daly Ditches Her Dovish Tendencies, Dons a New Hawkish Tone: San Francisco Fed President Daly, potentially the most dovish member on the Fed committee but one without a vote until 2024, said Wednesday that she is focused on three things in determining the appropriate path for policy, “Inflation, inflation, inflation.” She said there is a “really solid” case for raising the target rate range by 50 bps in May and supports “an expeditious march” that “purposefully” moves policy to neutral by the end of this year. “The economy is resilient; it can handle these adjustments,” she said.


TRADING ACTIVITY

Tech Shares Spoil a Stock Rally as Treasury Yields Fall from Multi-Year Highs: Tumbling tech shares spoiled the S&P 500’s efforts to add to strong Tuesday gains as a Treasury rally provided some relief from multi-year high rates. Tech-related sectors slid to the bottom of the S&P 500, offsetting gains across the remaining eight sectors. Netflix was in focus after shockingly weak subscriber metrics sent the company’s shares spiraling 35% lower, the second worst day in the company’s 20-year history. The company’s valuation has plunged more than 67% from its peak last November. Shares of Tesla were also a drag on the sector, selling off nearly 5% ahead of the company’s quarterly earnings release. Shares quickly regained most of their daily decline in after-hours trading, however, as profits beat analyst expectations. Although the Nasdaq dropped 1.2% and the S&P 500 edged lower, more than 75% of companies within the latter rose and the Dow gained 0.7%. Stocks outside of the tech space were more buoyant, potentially reflecting temporary relief from the incessant ascent for Treasury yields. The curve flattened sharply lower as longer yields pulled back from multi-year highs, a move that gained momentum in the aftermath of a strong auction of 20-year notes. The 2-year yield dipped 1.6 bps on the day to 2.58% after touching 2.62% overnight, its highest mark since December 2018, despite fed funds futures fully pricing in a 50-bp hike at the May meeting. The 5-year yield fell 5.5 bps to 2.86% after eclipsing 2.95% for the first time since November 2018. The 10-year yield dropped 10.4 bps to 2.83% after threatening 2.98% for the first time since December 2018. The spread between the 2-year and 10-year yields fell to a seven-day low of 25 bps. The 20-year yield led all declines, shedding more than 13 bps after an auction of the notes stopped through by 3 bps and produced a record bid-to-cover ratio.

Stocks Bounce Even as Treasury Yields Recover Higher: Treasury yields bounced back overnight but the curve continued to flatten with shorter rates leading the move higher early Thursday. The 2-year yield was 3.8 bps higher at 7:15 a.m. CT, setting a new cycle high at 2.61%. The 10-year yield trailed with a 2.3-bp increase to 2.85%, still well below yesterday’s session high just below 3.00%. The bear flattening dynamics mirrored moves across Europe. German yields led increases on the continent as its 2-year yield climbed 7.8 bps to 0.11%, its second highest level since May 2014, and the 10-year yield rose 2.6 bps to 0.88%. Data yesterday showed producer prices in Germany surged 4.9% in March, outpacing expectations for a 2.7% increase, and pushing the annual increase up from 25.9% to an astonishing 30.9%. Markets have continued to reprice for a more aggressive policy path this year from the ECB. The central bank’s chief will speak alongside Fed Chair Powell midday at an IMF event that is surely to draw investors’ attention. Despite the higher rates, equity markets gained positive momentum heading into the U.S. session. Chinese stocks tainted a mostly positive day across Asia amid continued concerns about the domestic outlook. The CSI 300 dropped 1.8%, a fifth consecutive decline, and closed at its second weakest level since June 2020. Europe’s Stoxx 600 rose 0.8%, however, and U.S. index futures were solidly in positive territory, led by a 1.2% gain for the Nasdaq. The earlier rise for Treasury yields had intensified ahead of the weekly jobless claims data, with the 2-year yield up 5.9 bps to 2.63% and the 10-year yield 3.7 bps higher at 2.89%. Those levels held shortly after the reports were released.


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