Mortgage demand plummets … commercial real estate deals fall … more reduced guidance from the retail sector … consumers are using more debt … why Luke Lango views this as bullish

The Fed wanted things to cool off. Well, it’s happening.

Let’s take a spin around the economy.

Yesterday, we learned that mortgage demand has fallen to its lowest level in 22 years.

Behind the drop are surging mortgage rates on top of already-stratospheric home prices.

The average 30-year fixed-rate mortgage stands at 5.40% today. As you can see below, they’ve nearly doubled since the beginning of 2021.

This dramatic rise is squeezing mortgage demand.

From CNBC:

Applications for a mortgage to purchase a home fell 7% for the week and were 21% lower than the same week one year ago.

Refinance demand dropped 6% for the week and was down 75% year over year.

Add to this an average home price that soared 20% year-over-year in May, and housing has simply become too unaffordable for many would-be homebuyers.

Yahoo Finance! reports that buyers of median-priced homes are now looking at monthly mortgage payments that are 53% higher than one year ago.

***Moving on to commercial real estate, we’re now seeing a similar slowdown

For the first time in more than a year, commercial real estate is cooling.

After 13 consecutive months of increase, commercial-property sales fell 16% in April year-over-year.

The sector has been red-hot since late 2020, as investors used historically low interest rates to buy up properties in expectation of a post-Covid rebound.

The most in-demand assets were multifamily and industrial properties. Those sales helped offset slower office-building sales, which were dragged down by remote work.

While a slowdown was logical based on climbing rates, what’s surprising is the speed of the sudden reversal.

From The Wall Street Journal:

April’s 16% decline in sales marked an abrupt turn from March, when total commercial property sales rose 57% from the same month a year before.

“The speed of that transition is shocking,” said Jim Costello, chief economist at MSCI Real Assets. A drop in sales can be an early indicator of stress in real-estate markets because prices are usually slower to change, he added.

Moreover, the prospect of a slowdown in the U.S. economy later this year or next is weighing on sales because it could lead to lower office, retail and apartment rents, analysts said.

The WSJ article points toward considerably higher interest rates as behind much of the reversal. The yield on the 10-year Treasury note, which a common benchmark for commercial mortgages, is up 99% in 2022 (and up 451% since August of 2020).

As I write Thursday mid-afternoon, it’s back up above the key level of 3%, sitting at 3.04%.

***The slowdown is impacting some retailers as well

In recent weeks, there have been some high-profile announcements of hits to earnings and forward guidance. It hasn’t been limited to specific sectors; we’ve seen it across the board.

There’s been reduced guidance from tech leaders including Microsoft, Snap, and Intel; big-box retailers including Walmart and Target; specialty retailers such as Gap and Bath & Body Works; and even Scotts Miracle-Gro, as a few examples.

On one hand, yes, we’re seeing some consumers spend less due to inflation. On the other hand, some of the retail slowdown stems from inventory write-offs.

For example, take Target. Earlier this week, the retailer announced it will take a short-term hit to profits as it clears out unwanted inventory. Behind this write-off is a shift in consumer preferences in the wake of Covid.

From CNBC:

By taking swift action, [CEO Brian] Cornell said Target can fend off further pain and make room for merchandise that customers do want, such as groceries, beauty items, household essentials and seasonal categories like back-to-school supplies.

He said the company’s stores and website are seeing strong traffic and “a very resilient customer,” but one who no longer shops popular Covid pandemic categories.

So, yes, we’re seeing a retail slowdown, but the cause of it is varied.

But let’s dig into this “resilient” customer a bit more. After all, as we look at the economy, consumer spending makes up roughly 70% of it.

Just how resilient is this customer? And for how long might it last?

***Are we seeing a consumer slowdown?

Not according to Bank of America CEO Brian Moynihan.

From Moynihan:

What’s going to slow [consumers] down? Nothing right now.

That’s a bold take. But before we try to poke any holes, let’s understand what’s behind this.

Moynihan explained that Bank of America’s customers have checking and savings accounts that are still larger than before the pandemic. Plus, when he made the comment in the last week of May, B of A customers were spending 10% more that month than the year-earlier period.

Yes, those are both positive data points on the surface. But exactly how much more money is in those checking and savings accounts? And rather than just look at the nominal value, what’s the status of the purchasing power of those balances after we adjust for inflation?

Those details weren’t provided.

As for the “spending 10% more” part of it, well, isn’t the latest year-over-year CPI number over 8%? Might that explain a big chunk of this year-over-year 10% spending increase?

Perhaps most interesting is the contradiction between a comment from Moynihan and a report from Bloomberg.

First, here’s Moynihan’s comment:

Consumers are in good shape, not overleveraged.

And now, Bloomberg:

US consumer borrowing surged again in April, following a record jump a month earlier, fueled by rising prices and the continued strength of American consumers…

With inflation largely outpacing wage growth, consumers have leaned on both savings and credit cards to pay for everyday essentials and discretionary purchases.

The savings rate is at its lowest level since 2008, and a record 537 million credit card accounts were opened in the first quarter, according to the New York Fed.

While that’s positive in the sense that consumer spending is by far the largest contributor to the US economy, it could be concerning if Americans fail to keep up on payments. That could ultimately mean a slowdown in the pace of inflation-adjusted consumption.

Overall, when we look at all of these data together, they do suggest we’re seeing a slowing economy and an increasingly cautious consumer.

***Now, while that might point toward further pain for the average S&P stock, our hypergrowth expert Luke Lango believes it’s evidence of a new bull market for tech

Let’s turn to Luke’s Daily Notes from his Early Stage Investor service to see how he’s viewing some of the very same issues we’ve highlighted in today’s Digest.

Here’s Luke on Target and its guidance announcement:

Target (TGT) issues a profit warning, and it’s music to our ears. 

[Earlier this week], Target said that its second-quarter profit margins would clock in around 2%, versus ~5% guidance issued just three weeks ago…

While bad news for Target, this is fabulous news for us. Big inventory build? Supply chain improvements? Discount selling? All those dynamics point to cooling inflation. Importantly, these are not Target-specific.

Across the entire retail sector, inventories have been rebuilt to their historically normal trend line, meaning retail supply has finally normalized. Stabilized supply should create broad deflationary trends across the entire sector.

And what about the yield on the 10-year Treasury, which is impacting the housing and commercial property markets? Here’s Luke:

The 10-year moved higher today but only by about 2 basis points, and it increasingly appears that yields are consolidating around 3% before breaking out or breaking down meaningfully. That breakout or breakdown will likely happen in the wake of Friday’s CPI data.

A hot CPI print would cause a breakout to 3.2%. A cool CPI print would cause a breakdown to 2.8%.

We see the latter as far more likely. And if we do see a cool print, it should provide additional firepower to the current market rally.

And what about consumer spending? Well, that’s heavily tied to the condition of real wages. Here’s Luke on that:

[From the recent jobs report we learned that] wage growth missed expectations. And average hourly earnings growth was just 5.2%, representing the second consecutive month of slowing growth.

That’s a first since early 2021 and indicates that one of the stickier elements of inflation – wages – is becoming less and less of an inflationary driver.

That’s a huge positive for inflation’s future trajectory.

Bottom line, though broad sentiment is bearish, Luke believes top-tier tech stocks have already begun a new, real bull market.

That doesn’t mean there won’t be pullbacks and volatility, but Luke sees recent gains in the tech sector as the real deal:

Overall, we still believe this is the start of a new tech bull market that lasts for the balance of the decade.

That said, brace for a near-term setback. That’s how markets are – two steps forward, one step back. But the trend should remain very positive for our (elite hypergrowth tech) portfolios.

We’ll keep you updated.

Have a good evening,

Jeff Remsburg