The CPI Tomorrow Will Be…

Mortgage rates jump … the BLS finds that consumers are spending more than their incomes … “scary” online holiday sales forecasts … will we see negative CPI tomorrow?

Lots happening in the news, so today, let’s bounce around to several stories impacting your portfolio.Last Friday, we learned the 30-year fixed rate mortgage has climbed back to a 52-week high. According to Forbes, it’s now at 6.18%.Rates are rising as the markets digest commentary from Federal Reserve Chairman Jerome Powell and various other Fed presidents that point toward additional rate-hikes to come, as well as a period of elevated rates even after the hiking stops.The specific link between the Fed and high mortgage rates is the 10-year Treasury yield.Here’s CNN Business to explain:

The Federal Reserve does not set the interest rates borrowers pay on mortgages directly, but its actions influence them.Mortgage rates tend to track 10-year US Treasury bonds. As investors see or anticipate rate hikes, they often sell government bonds, which sends yields higher and with it, mortgage rates.

Below, we look at the yield on the 10-year Treasury bond since August 1. Is it any wonder that mortgage rates are spiking again?

Chart showing the 10 year treasury yield surging since August

And to help you see the relationship between the 10-year yield and the 30-year fixed mortgage rates, here they are together.You’re looking at their percentage changes here in 2022 which better illustrates their parallel relationship.

Chart showing the 10 year Treasury yield and the 30 year mortgage rate moving in parallel fashioni

But would-be homebuyers shouldn’t hold their breath waiting for a recession in home prices

U.S. home sales are down about 20% from a year ago. And, yes, this has led to a small reduction in home prices.Specifically, according to the National Association of Realtors (NAR), the median price for an existing home in the U.S. dropped from a record high of $413,800 to $403,800. That’s a 2.4% haircut.But when you consider that median home prices have soared by nearly 36% since the pandemic began, a price reduction of around 2.4% isn’t much help.According to NAR’s most recent forecast, home prices will still be up 11% when the year ends – and they’re expected to climb another 2% next year.If you’ve found a house you love, you might be disappointed if you wait for its price to drop. Here’s Lawrence Yun, NAR’s chief economist on that note:

This isn’t a recession in home prices. A price decline on a nationwide basis is unlikely.

If you missed yesterday’s Sunday Digest, our own Luke Lango presented loads of housing data, making the case that we’re nowhere near a housing crash.As to “why”, he pointed toward the supply/demand imbalance. In short, there remains limited housing supply (at reasonable prices) relative to the demand.From Luke:

The NAHB index for the traffic of prospective buyers is probably the best metric for gauging home-buying desire. It measures buyer traffic in the housing market in any given month. If folks are going to see homes, they’re likely interested in buying one.That index currently stands at 32. That’s down from where it was throughout 2021 (above 60). But it’s also well-above where it was when home prices started to decline in the early 1990s and the late 2000s (sub-20 readings).The desire to buy a home is still more than double where it was during previous periods of home price declines.

Put it all together and it’s unlikely that we’ll see a housing market crash. But what we are seeing is higher shelter costs (which includes rental rates) rising faster than income levels, which is impacting the U.S. consumer.

On that note, last week, the Bureau of Labor Statistics (BLS) released data finding that U.S. household spending rose twice as fast as income last year

In its annual study of expenditures, the BLS found that the average income per consumer unit, before taxes, climbed 3.7% in 2021. However, spending jumped 9.1%.Meanwhile, over the studied period, inflation averaged 4.7%. So, incomes failed to keep up with the rising cost of living while spending outpaced it.As a result, the U.S. savings rate has shrunk.According to New York Life’s latest Wealth Watch survey, 36% of people say they withdrew an average of $617 from their savings accounts during the first six months of this year.Over that same period, the Federal Reserve Bank of St. Louis found that the U.S. personal savings rate fell to 5.1% in June from 8.7% in December 2021.Since then, it has continued to drop. The latest data we have come from July, when the rate fell to 5.0%.As we’ve noted before in the Digest, keep your eye on the health and spending of the U.S. consumer. This is what will make or break our economy in the months ahead.

In related news, Amazon sellers are eyeing U.S. online holiday sales growth that will be in the single digits for the first time ever

Last week, we learned that Amazon merchants are fearing they’ll need to cut prices to move loads of unsold inventory. This is a stark departure from the pandemic years when sellers scrambled to get enough product to meet demand.Here’s Bloomberg on how this is impacting sales forecasts:

This year US online sales will rise just 9.4% to $1 trillion, the first time growth has slipped into the single digits, according to Insider Intelligence, which in June lowered its earlier annual forecast.Spending on Amazon will hit $400 billion, up 9% and slower than the overall industry, the research firm says.“Consumers don’t seem to be spending much on anything beyond basic necessities, so sellers have to offer discounts and coupons and aggressive marketing, which can be expensive,” said Lesley Hensell, a co-founder of Riverbend Consulting, which advises Amazon sellers. “The fourth quarter looks scary this year.” 

Adding to this consumer slowdown is a strong dollar – which, taken together, is leading analysts to curb their earnings forecasts for Q3

Legendary investor Louis Navellier made this point in his Market 360 issue last week.After touching on September’s history of bad market performance as well as market noise thanks to the Fed and Covid lockdowns in China, Louis highlights what he calls “the third storm cloud: a decline in the S&P 500 earnings.”From his update:

Most of the S&P 500’s industries are now forecast to post earnings declines for the rest of 2022 – and this earnings decline is the third storm cloud overhanging Wall Street.According to FactSet, the analyst community has lowered third-quarter earnings estimates by a bigger margin than normal. Earnings estimates have been slashed by an average 5.4%.

Louis echoes a point we’ve highlighted in recent Digests – the strength of the U.S. dollar has been weighing on earnings for companies in the S&P 500. This is because, as Louis writes, “nearly half of the S&P 500’s revenues come from outside of the U.S., so many multinational companies are struggling due to a strong U.S. dollar.”Back to Louis:

…While it pains me to say this, the upcoming third-quarter earnings season will be ugly for many S&P 500 companies. My favorite economist, Ed Yardeni, expects the S&P 500’s earnings to decline 5.4% in the third quarter.

I should point out that the way Louis is handling this challenge is by focusing on companies that are able to maintain robust earnings and sales growth, while trading at low valuations.For example, in Louis’ Breakthrough Stocks service, his “buy list” stocks feature 43.3% average annual sales growth and 204.1% average annual earnings growth. And they’re currently trading at a median price-to-earnings ratio of 10.9X current earnings. For comparison, the S&P’s price-to-earnings ratio today is 20.54.

Finally, tomorrow is a huge day for stocks because the new Consumer Price Index report comes out

And there’s a rumor that we might not only see a flat number, but a negative number.Here’s Louis from last Friday’s Platinum Growth Club Special Market Podcast:

If you really want to know why the market is [up so big on Friday], there are rumblings out there that the CPI for August could be negative, which would clearly knock down the inflation rate. That is the rumbling in the rumor mill.I don’t like to be part of that, but I just want you to know that’s what has lots of the traders gossiping [on Friday] on Wall Street.If we do get a negative CPI, or CPI continues to essentially be unchanged as it was in July, it’s going to take pressure off the Fed.

Louis believes that even if this happens, the Fed will still raise rates by 75 basis points at the next meeting. However, Louis thinks that will be the last time they raise rates in 2022.And when Wall Street realizes the Fed is done, Louis says “we rally…we launch.”We’ll keep you updated on tomorrow’s CPI here in the Digest.Have a good evening,

Jeff Remsburg

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