The Boom and Fall of Stock Markets: What Happened after the Fed Sentiments to Wall Street Rates Hide? An Audio Analysis of the Before the Bell Newsletter

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The markets fell after the inflation data raised fears on Wall Street that the Fed would continue hiking interest rates. Then, something strange happened.

Stocks staged a massive comeback. The broadest trading range since March 2020 is what the S&P 500 had on Monday, with it jumping from a peak to a trough and ending up up 2%.

The Consumer Price index rose 0.4% in September from the previous month, double the estimate from Refinitiv. On an annual basis, inflation was up 8.2%.

The Fed acknowledged on Wednesday that inflation is easing but said that it would keep raising interest rates. The rate hike signaled more good news for inflation, even though it was already factored in to where mortgage rates are.

So what explains the sharp divergence between markets and seemingly terrible inflation data? The stronger-than expected inflation report could mean that prices are near their peak, which may cause investors to bet on it. The rollercoaster market illustrates how investors are desperately grasping for clues about what the Fed will do next.

The End of the 2008 Financial Crisis and the Evolution of Household Wealth in the 2022 Regime: New Facts from Freddie Mac and Wall Street Retail Sales

A new report claims that household wealth is on track for its first significant reduction since the financial crisis in 2008.

Global assets are set to decline in 2022, according to the report. Households will lose about a tenth of their wealth this year.

The report paints a bleak picture. The 2008 financial crisis was marked by a relatively quick turnaround, but the current outlook shows stagnant growth in the future. Financial assets are expected to grow around 4.6% over the next few years, compared with 10.4% in the last three years.

Russia’s war on Ukraine has obstructed the potential for a post-pandemic economic recovery, and increased food and energy scarcity. Inflation is rampant and central banks around the world are raising borrowing costs. Stock markets are likely to end the year in the red– 2021 “might have been the last year of the old ‘new normal’, with low interest rates and bullish stock markets,” wrote Allianz researchers.

Household debt, meanwhile, has been on the rise globally. “The context of rising interest rates and the higher cost of living could pose a risk to household balance sheets,” reported researchers.

The insurance company calls these changes a “tonic shift” in global wealth that will take years to recover from. Today’s release of US retail sales for September will likely shed more light on the state of the consumer, as will earnings reports from some of the country’s largest lenders — JPMorgan

            (JPM), Citigroup

            (C), Wells Fargo

            (WFG) and Morgan Stanley

            (MS) all report this morning.

Mortgage rates have ticked down recently, but are still up dramatically from a year ago thanks to the surge in long-term bond yields as the Federal Reserve hiked interest rates.

The rise in mortgage rates has caused a chill in the housing market. Many buyers have paused their search; they can longer afford home prices they were considering a year ago. Although high mortgage rates can be intimidating, sellers are hesitant to list their homes because of that.

“We continue to see a tale of two economies in the data,” said Sam Khater, Freddie Mac’s chief economist. Consumers are keeping their balance sheets positive while housing demand is going down because of recession fears and affordability.

The End of Homebuying: The Future of Netflix Streaming Market Intelligence and Mortgage Applications as a Function of Interest Rates and Mortgage Rates

Today, a homeowner buying the same-priced house with an average rate of 6.92% would pay $2,059 a month in principal and interest. That’s $735 more each month.

The slowdown in housing activity and higher mortgage rates will cut the pace of home price growth, according to MBA. The projected national home prices will be roughly flat in the next two years.

The new option will feature much of what’s available with Netflix’s current $9.99 a month Basic plan, but will include an average of four to five minutes of commercials per hour. Those ads will be 15 or 30 seconds in length and will play before and during TV series and movies.

Following that news, the stock tumbled, and the company lost billions in market cap. Hundreds of employees were laid off, and doubts ran rampant about the platform’s future, raising questions about the viability of the entire streaming marketplace.

JPMorgan Chase

            (JPM), Wells Fargo

            (WFM), Citigroup

            (C) and Morgan Stanley

            (MS) report third quarter earnings before the bell.

Forecasters, again, predict a wide range of where rates will go in 2023. The 30-year fixed-rate loan will be at least 7 percent in 23 years, according to Realtor.com, but the real estate website predicts rates will be closer to 6 percent this year.

The unemployment rate in the US was 4.3% in November, which is historically low and offers 1.7 jobs for every jobseeker. If job numbers come in as expected on Friday, 2022 will be the second-best year on record for job growth.

Home shoppers are not going to find much supply in the market and affordability is still a challenge, particularly for first-time buyers. We should expect prices to be stable or rise in the year ahead, because of the persistent lack of inventory, and because of the rate lock.

“Mortgage application activity sunk to a quarter-century low this week as high mortgage rates continue to weaken the housing market,” said Sam Khater, Freddie Mac’s chief economist. Inflationary pressures should lead to lower mortgage rates in the future due to the decrease in mortgage market activity.

The current market is not good for would-be buyers because Americans are unwilling to part ways with their low mortgage rates.

MBA estimates that a 25% to 30% decrease in mortgage industry employment from peak to trough will need to occur, given the decrease in production volume from the record levels in 2020 and 2021.

The Great Depression and the Rise and Fall of the Mortgage Rate-to-Value Ratio Causality: A Commentary from Eric Lundh

The Conference Board has a principal economist namedErik Lundh. He has his own opinions in this commentary. Read more opinion at CNN.

Additionally, years of rampant demand spurred builders to overbuild in the early 2000s, flooding the country with a home surplus. As a result, following the Great Recession, it took years for demand to work through the vast housing stock that had been amassed. This, in turn, crushed the homebuilding industry, causing chronic underbuilding over the subsequent years.

The years after the financial crisis saw the introduction of new regulations. Banks are required to be better capitalized; lending standards are more rigorous; and most mortgage investments are fixed-rate. This makes the financial system more stable during another housing downturn.

Freddie Mac’s chief economist said rates have declined significantly over the past six weeks, which is good news for potential buyers.

Americans have more equity in their homes than they did before the last financial crisis. Indeed, loan-to-value ratios, which measure the amount of a mortgage relative to the value of a home, for US mortgages have fallen to just 42% – a 12-year low. This creates more of a “cushion” for prices to decline before home values fall below the loans that underpin them. If a home is sold for a loss it will hit homeowners before it hits the banks.

Mortgage Rates and Applications Decreasing After Inflation: Freddie Mac, the Mortgage Bankers Association, and the National Association of Realtors

The Bureau of Labor Statistics released a closely watched index that shows that inflation cooled considerably in November and was at its lowest level in nearly a year.

Freddie Mac gets mortgage applications from thousands of lenders across the country and this is what determines the average mortgage rate. Only borrowers who have excellent credit and put 20% down are included in the survey. Many buyers who put down less money upfront or have less-than-perfect credit will pay more than the average rate.

The Fed doesn’t set interest rates on mortgages directly, but its actions can influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. Mortgage rates tend to follow Treasury yields when yields go up and down.

Fed Chair Jerome Powell mentioned in his remarks that with prices still rising at a high rate, more rate increases are needed and the central bank remains committed to rate hikes until the pace of inflation notches a noticeable slowdown, Ratiu said.

Ratiu said that the cooling of inflation should help ease the upward pressure on mortgage rates.

The search for affordability has led many people to look at metro areas where the cost of a house can fit within larger budgets, according to George Ratiu.

After a month of declines, mortgage applications ticked up last week as buyers looked to take advantage of several weeks of slightly lower rates, according to the Mortgage Bankers Association.

“Overall application activity declined last week, despite lower rates, which is an indication of the still volatile time of the year for housing activity,” said Joel Kan, MBA’s vice president and deputy chief economist. “Purchase activity is expected to pick up as the spring homebuying season gets underway, bolstered by lower rates and moderating home-price growth. Both trends will help some buyers regain purchasing power.”

A long list of housing data is on tap. On Tuesday the US Census Bureau will report housing starts and building permits figures for November, followed by Friday’s release of new home sales data for the same month. In between that will be the November existing home sales numbers from the National Association of Realtors on Wednesday, as well as weekly data on mortgage rates and applications on Thursday.

Still, there are some promising signs that the worst could soon be over. The shares of the homebuilders surged after reporting their earnings last week. Revenue was higher than expected, and the company’s guidance for the number of homes it expected to deliver next year was a tad higher than analysts’ estimates.

CFRA Research analyst Kenneth Leon said investors may be looking forward to a potential recovery in the company’s stock price.

Home prices are up more than 40% since pre-pandemic levels. So even a further drop of about 15% would merely bring them to mid-2021 levels. In other words, this isn’t like the mid-2000s real estate bubble bursting.

It’s also worth noting that the job market is still strong and wages are growing. Consumers still have a lot of excess savings thanks to the government.

Others point out that even though housing sales may remain weak due to high home prices and still elevated mortgage rates, the good news is that most existing homeowners are still paying their monthly mortgage on time.

Again, that’s a stark contrast from 2008 when many people with subprime loans or borrowers with poor credit histories were unable to keep up with their mortgage payments.

“Housing is not bringing down the economy. In the housing market, it has been impacted. But mortgage delinquencies are still low,” said Gene Goldman, chief investment officer at Cetera Investment Management.

There aren’t a ton of companies reporting their latest earnings this week. There are a few that may give more clues about the current state of corporate spending and consumer finances.

Cereal giant General Mills

            (GIS) will release earnings on Tuesday. Analysts expect a slight increase in both sales and profit. People are growing more cautious about inflation, but they are still eating wheaties. General Mills shares have increased in value this year.

Analysts are less optimistic about the outlook for Nike, CarMax, and Micron whose products are used in everything from cell phones to cars.

A lot of investors are going to be closely watching what the companies say in their earnings reports. Analysts currently are anticipating earnings growth of 5.3% for 2023. If the economy starts to worry, that could mean that companies will start to cut forecasts.

There is a high chance of a recession, said Vincent Reinhart, chief economist and macro strategist at Dreyfus and Mellon. That will have a negative effect on corporate earnings. Higher rates and weaker earnings indicate more pain for the stock market.

Tuesday: US housing starts and building permits; China sets loan prime rate; Bank of Japan interest rate decision; earnings from General Mills, Nike, FedEx

            (FDX) and Blackberry

            (BB)

The Dow Sank Thursday: Putting the Fed on a Faster Track in the Recovery of the Fourth-Quarter-Fedular-Period Gross Domestic Product

The Dow sank as America’s economy grew much faster than previously thought in the third quarter, a sign that the Federal Reserve’s battle to cool the economy to fight inflation is having only a limited impact.

The Commerce Department reported Thursday morning that gross domestic product grew by 3.0% between July and September. That was above the 2.9% estimate from a month ago. Economists surveyed by Refinitiv had expected GDP to stay unchanged from its previous reading.

The report said the stronger-than- expected reading was due to increases in exports and consumer spending that were partially offset by a decrease in new housing spending. Consumer spending is the main component of the nation’s economy.

US stocks tumbled Thursday on fears that the stronger-than-expected GDP could prompt the Fed to continue to raise rates more than expected in 2023. Stocks ended the day off their lowest levels but the Dow still lost nearly 350 points, or 1.1%, while the S&P 500 fell 1.5% and the Nasdaq was down 2.2%.

“The data was stronger across the board, and if there’s anything the Fed does not want to see these days, it’s better than expected data,” said Paul Hickey of Bespoke Investment Group.

“The reality of the Federal Reserve’s determination is sinking in,” said David Kotok, chairman and chief investment officer at Cumberland Advisors, referring to efforts to get the economy back on a path towards 2% inflation. “”I don’t see how a recession is avoidable unless the Federal Reserve changes its policy.”

Source: https://www.cnn.com/2022/12/22/economy/gdp-third-quarter-final/index.html

Inflationary Trends in the U.S. and Dec. – The Effect of a Strong Decline in Job Creation and Labor’s Benefits

There is part of the wide swings we are seeing that is related to the fact that many traders and investors are on vacation and each new data gets overpolated in both directions.

The inflation reading has slowed in recent weeks, but the economy has not weakened. Some surveys released this week suggest the Fed’s higher rates are not slowing spending by businesses or consumers.

A recent survey of chief financial officers found the current level of interest rates have not impacted their spending plans. And consumer confidence improved in December according to a survey by the Conference Board, reaching the highest level since April.

In addition, employers have continued to hire at a historically strong pace, although layoffs have increased in some industries, especially technology.

Initial weekly claims for unemployment insurance benefits increased by over 20k for the week ended December 17 The previous week’s total was changed to 214,000.

Continuing claims dropped slightly to 1.672 million for the week ended December 10. The previous week’s number of continuing claims was revised up.

The Long-Sleading Real Estate Market Has Declined For 10 Months, and So has the Number of Unsold Homes

“We decided to just kind of settle down in our life because we were financially stable and wanted to start having children and we also wanted to be able to have some kids,” says Paul, 34.

High home prices made the initial hurdle hard to overcome. When the Pauls first started looking, low interest rates in Boston caused a buying frenzy and they were constantly outbid.

“You know, two dozen other offers, and they’d all be $100,000 over asking,” says Paul. It was gone before we could look at it, even if we waited until the weekend.

Yun and others describe the market as frozen, one in which home sales activity has declined for 10 months straight, according to NAR. It’s the longest streak of declines since the group started tracking sales in the late 1990s.

Even as sales activity has slumped, home prices have remained high because of low inventory. The number of unsold homes decreased for a fourth consecutive month in November.

At an open house for a charming starter home in Hollywood one recent weekend, agent Elijah Shin didn’t see many people swing through like he did a year ago.

Real Estate Markets Continue to Grow as the Fed Slows Inflationary Rates Threshold: A Mirror Image of 2022

Throughout 2022, the Federal Reserve hiked its benchmark interest rate at a record pace to slow the economy and fight high inflation. The most interest rate-sensitive sector of the economy was housing. The Fed’s actions meant that housing affordability deteriorated, which resulted in declining sales and slower annual price growth.

There is likely to be a return to the traditional seasonality of the real estate market, in which inventory tends to rise in February and carry through the summer. Meanwhile, prices often peak in May or June and prices and sales tend to slowly decline until the end of the year.

He said more inventory would then become available from the locked-in homeowners clinging to their ultra-low mortgage rates from the past couple of years.

The other side of the country may experience a small price gain, while the half of the country that does not may see a small price decline. “However, markets in California may be the exception, with San Francisco, for example, likely to register price drops of 10%-15%.”

“Markets like Manchester, New Hampshire; Columbus, Ohio; Fort Wayne, Indiana; Hartford, Connecticut; Lancaster, Pennsylvania; or Topeka, Kansas are still seeing homes change hands as buyers from more expensive locations are lured by solid local economies and median prices, which in some cases are still below $300,000,” Ratiu said.

In November, as mortgage rates started a six-week tumble, the median monthly mortgage payment fell by 1.8% to $1,977 from $2,012 in October, according to the Mortgage Bankers Association.

After the 30-year fixed mortgage rate eclipsed 7% in late 2022, Yun said he expects that to settle at 5.7%, as the Fed slows the pace of rate hikes in response to slowing inflation.

In 2023, we may see a mirror image of 2022 — a somewhat trying first half that gives way to a surprisingly strong back half of the year for buyers, said Leonard Steinberg, corporate broker at Compass in New York.

“The would-be buyers that stepped back from the market in late 2022 can’t and won’t stay away forever, especially given the competing demands from first-time buyers looking to get into the market and retirees looking to move or downsize,” Steinberg said.

Chronic under-building of new homes is also likely to remain a challenge across all market segments as builders grapple with the challenge of balancing a short-term decline in demand with the long-term need for more new housing, he added.

Real Estate Buyers are Ready for the New Year: Predicting the Future with Real Estate Rates in a Resilient Labor Market

Buyers are likely to pay more during the spring selling season, when homes tend to sell for a seasonal premium because that’s when most buyers are trying to get it done.

The beginning of the year tends to be among the quietest times in the seasonal real estate market, but this year is even moreso given that higher rates and still-elevated prices are creating a barrier for many buyers.

He said that if the labor market is not able to fill millions of open jobs, it will have to experience a significant drop in spending. “This scenario is more likely if corporate executives overreact to the recession chatter and preemptively cut payrolls, which would create a self-fulfilling downward spiral.”

The usual pattern is expected to kick in when more inventory becomes available and buyers start to look at what is out there, as long as sellers are willing to give up the low rates they enjoyed in the past.

“We may have to wait until the start of the spring shopping season for more clarity on the direction of housing markets this year, especially as both buyers and sellers are pulling back from the marketplace,” he said.

We’re in the salad days of the New Year — that period where many feel refreshed and motivated and perhaps even optimistic about the year to come. This time of year there is a certain clarity.

Ratiu said that most recent indicators point to a resilient economy. Job openings in December were higher than at any time in the past seven months, according to the Job Openings and Labour Turnover Survey, or JOLTS.

This is all happening as the Fed tries to actively cool the labor market. Policymakers fear that the high inflation levels of the past will be maintained by persistent wage growth in a tight labor market.

In an interview with the Financial Times this week, Gita Gopinath, second in command at the International Monetary Fund, urged the Fed to continue with rate increases this year, citing the labor market’s resilience.

Will wages moderate this year? Analysts at Goldman Sachs predict that they will. They think that wages will grow at a slower rate than in the past, with unemployment growing and wage growth falling by the end of the year.

“This would still be a bit too hot, but any sizeable drop would provide Fed officials with a proof of concept for the idea that gradual labor market rebalancing can dampen wage and eventually price pressures without a recession,” they write.

Why the US Consumer is Staggered Off the Supercycle? Bank of America, Home Goods Chain, and Bed Bath & Beyond

Bank of America CEO Brian Moynihan told CNN around the holidays that the continued strength of the US consumer is nearly single-handedly staving off recession.

US retail sales fell 0.6% in November, the weakest performance in nearly a year. Weak sales are likely to continue, say analysts, and if they do, retailers’ earnings will suffer.

The answer to this is not just important for the markets this year, but for the economy as well.

The Fed could opt for more modest increases or not at all as the year progresses, despite rate cuts not being on the table this year. That would be welcome relief to investors after four hikes of three-quarters of a point last year.

And while officials welcomed softer inflation reports in recent months, they stressed that “substantially more evidence of progress” was required and said that inflation was still “unacceptably high.”

There is “substantial doubt about the company’s ability to continue” because of its worsening financial situation, the home goods chain said in a regulatory filing.

But the Wall Street Journal reported that Bed Bath & Beyond is preparing to file for bankruptcy within weeks, citing sources familiar with the matter. Bed Bath & Beyond did not reply to CNN’s request.

The Rise of Mortgage Rates in the US Residential Real Estate Market: Inflation and Home-Purchase Rate Increases in November

US home prices dropped for the fifth month in a row in November, as rising mortgage rates pushed prospective buyers out of the housing market late last year and prices continued to cool, according to the latest S&P CoreLogic Case-Shiller US National Home Price Index, released Tuesday.

In July of last year the national index went down for the first time since February of 2012 and in November it went down for the third time in four months.

All cities in the 20-city index reported declines before seasonal adjustments. After seasonal adjustments, 19 cities still reported declines, with only Detroit increasing 0.1%.

The latest S&P CoreLogic Case-Shiller US National Home Price index showed that home prices increased in November, but at a slower rate than they did in October.

Cities in the South led price appreciation, with Miami; Atlanta; and Tampa, Florida, all reporting the highest year-over-year gains among the cities in the 20-city index in November. Miami led the way with an 18.4% price increase from the year prior, followed by Tampa and Atlanta. All 20 cities reported lower price increases in the year ending November 2022 compared to the year ending October 2022.

Bright MLS chief economist Lisa Sturtevant said that the November report provided evidence of the slowing housing market during the fall but it might not show the worst of the housing market.

As a result of the one percentage point reduction in rates, as many as three million more borrowers will be able to afford a $400,000 loan, according to Freddie Mac’s chief economist.

The Fed raised the federal lending rate by one-quarter of a point on Wednesday. The move to slow the pace of increases sends a clear signal that the central bank is seeing progress in its battle with inflation.

He expects mortgage rates to stay at around 6,400 for the next few weeks, because of the effect of the Fed’s actions.

The next inflation report is set to be released February 14 and economists are looking to see if the pace of price hikes continues to slow.

“For today’s buyer of a median-priced home, the down payment amount is lower than it would have been last summer,” said Ratiu. “While that is positive news, affordability remains a primary challenge, especially for first-time buyers.”