Economic update for the week ending August 20, 2022

Stock markets - Stocks ended the week lower snapping four consecutive weeks of gains. At the beginning of the week, investors were upbeat about the July retail sales report. Upon first look, the report did not seem as positive as investors interpreted it because sales were mostly flat, but when gasoline sales, which dropped 1.8% due to dropping gas prices, were stripped out those dollars went to sales of other goods. For example, internet retail sales were up a shocking 2.8% in July. This showed that consumers are still outspending despite higher prices. There was good news on the inflation front as well. The cost of living was unchanged in July for the first time since May 2020. Unfortunately, on Friday minutes from the July Fed meeting were released. The minutes indicated that the Fed would continue to aggressively raise interest rates and reduce its balance sheet to further cool the economy. Investors had previously felt that the aggressive rate of hikes and tightening would be moderating due to signs that inflation had peaked in June. Stocks dropped after the minutes were released and stock markets closed the week lower ending a four-week winning streak.

  • The Dow Jones Industrial Average closed the week at 33,706.44, down 0.2% from 33,761.11 last week. It is down 7.2% year-to-date.

  • The S&P 500 closed the week at 4,228.48, down 1.2% from 4,279.96 last week. The S&P is down 11.3% year-to-date.

  • The NASDAQ closed the week at 12,795.22, down 2.0% from 13,047.19 last week. It is down 18.4% year-to-date.

U.S. Treasury bond yields - The 10-year treasury bond closed the week yielding 2.98%, up from 2.84% last week. The 30-year treasury bond yield ended the week at 3.22%, up from 3.12% last week. We watch bond yields because mortgage rates often follow treasury bond yields.

Mortgage rates – The Freddie Mac Primary Mortgage Survey reported that mortgage rates as of August 18, 2022, for the most popular loan products were as follows:

  • The 30-year fixed mortgage rate was 5.13%, down from 5.22% last week.

  • The 15-year fixed was 4.55%, down from 4.59% last week.

  • The 5-year ARM was 4.39%, down from 4.43% last week. Rates moved higher at the end of the week after the Fed minutes were released.

U.S. existing-home sales - The National Association of Realtors reported that existing home sales totaled 4.81 million units on a seasonally adjusted annualized rate in July, down 5.9% month-over-month from the annualized number of sales in June.

Year-over-year sales were down 20.2% from an annualized rate of 6.03 million in July 2021. The median price of a home in the U.S. in July was $403,800, up 10.8% from $364,600 one year ago. July marked a record 125 consecutive months of year-over-year increases in the median price. There was a 3.3-month supply of homes for sale in July, up from a 2.6-month supply last July. First-time buyers accounted for 29% of all sales. Investors and second-home purchases accounted for 15% of all sales. All-cash purchases accounted for 24% of all sales. Foreclosure and short sales accounted for less than 1% of all sales, remaining at a historic low.

Housing Starts

Housing Starts in July declined by -9.6% to a seasonally adjusted annual rate of 1.446mln vs. the revised June estimate of 1.599mln. This is now the lowest level for starts since February 2021. Looking YoY, housing starts are -8.1% below the July 2021 rate of 1.573mln. Single-family starts in July dropped -10.1%, while multi-family starts fell by -10.0%. Building permits in July fell by -1.3% to an annual rate of 1.674mln but came in up +1.1% above the July 2021 rate of 1.655mln. Single-family permits fell by -4.3%, while multi-family were up by +2.5%. The effects from higher mortgage rates appear to be impacting some regions more than others. The South and Midwest have seen sharp declines in housing starts over the past three months, down by -31% and -37%, respectively. In the West, the decline has been a bit more moderate, down by -14%, while starts in the Northeast actually increased in the past 3 months and are now at their highest level in years.

It feels like we are in an extended wait and see period in the market, as the market is waiting for more jobs and inflation data so they can get a feel for where the Fed will land on its rate hike in September. For the time being, the driver of the mortgage markets is still inflation and the Fed. Even though we may have seen peak inflation in the U.S., it is still too high and to combat that we will need to have rates above neutral for some time. For the time being, growth fears have waned as inflation has started to come down and July's strong jobs numbers have given the market optimism that it withstands the rate hikes the Fed has done and is planning on doing. We may see some more volatility soon as the Fed is more data dependent, best be careful.

Initial Jobless Claims

Initial Jobless Claims declined by -2k to 250k for the week of August 13th vs. the revised 252k from the prior week (orig. 262k). The 4-week moving average for claims fell by -2,750 to 246,750. Claims has hit their lowest levels in 50 years, but since April have moved higher with their 4-week moving average rising by roughly 80k during that time. Continuing claims, which lag by a week, were up by +7k, totaling 1.437mln vs. the prior 1.43mln.

Retail Sales

Retail Sales in July was flat at 0.0% change, with sales ex-autos rising +.4%. June's gain was revised downwardly to +.8% from an originally reported increase of +1.0%. Looking back into the July report, fuel prices fell sharply with gas station receipts down -1.8%. Motor vehicle and parts dealers sales are dropped, down -1.6% on the month. Those declines were offset, however, by an +2.7% increase in online sales and a +1.5% increase in misc. stores. Food sales rose by only +.2%, with sales at bars and restaurants only up +.1%. Retail sales represent roughly half of total consumption; the other half captures service spending, including travel-related spending which was likely robust in July. Overall, a relatively uneventful release this morning that will have very little impact on FOMC expectations.

Industrial Production

Industrial Production in July came in very hot at +.6% vs. market expectations of only a +.3% increase. Capacity utilization also posted better at 80.3% vs. consensus of 80.1%. Manufacturing output also rose, now at +.7% vs. the expected +.2%. June saw some revisions as well with industrial production now printed at 0.0% instead of the previous -.2%. Capacity utilization is revised down to 79.9% from 80%, while manufacturing output also got revised, now at -.4% versus -.5%. Within the industrial production data for July, the major sectors which are final products, nonindustrial supplies, and materials, all saw better gains. Although a bit mixed by the latest regional surveys, production has also increased in manufacturing. Mining, while off the pace from June, still posted +.7% on the month, while utilities contracted for the second month in a row, dropping by -.8%.

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