Fed Chair Powell Hints at Pause in Rate Hikes… In a speech this week, Powell noted that rates are just below neutral and that the Fed will pay close attention to economic data.
What it means – The words were music to the ears of investors. He might have been discussing rates, but investors saw gains.
If the Fed takes a breather from raising rates, then lenders should be more willing to disperse cash at lower rates, which will help the housing and auto markets. This will also reduce interest rates on credit cards, giving consumers a bit more room to spend. Historically low rates, which is where we are today, will also help stock valuations and will lessen the chance of investors leaving equities for fixed income. The news sent the Dow up more than 600 points.
The question is, “Will it last?” I’m not betting on good times ahead. With the Fed still shrinking its balance sheet by $50 billion per month, economic growth slowing down both domestically and abroad, and an on-going trade spat, this looks like a better opportunity to hedge or sell than load the boat.
S&P/CoreLogic Case-Shiller Home Price Index Slows… The home price index increased 5.1% over September of 2017, which is down from the 5.5% rate of growth in August.
What it means – Home prices went flat over the summer and have moved lower in recent months. It’s worth remembering that this index reports on a two-month lag, so expect it to drop several percentage points over the next two months.
With mortgage rates up more than 1% this year and consumers cautious on the future, it’s hard to see how real estate prices and sales turn around anytime soon. This will spill into the rest of the economy by slowing down employment in the real estate sector and crimping sales in home furnishings and renovations.
New Home Sales Down 8.9%… New home sales are down 12% over this time last year.
What it means – New home sales for August and September were revised up by 50,000, which took a little bit of the sting out of this month’s report, but the annual figures still show pain. We reached a high point of 712,000 units sold in the current market, and we’ve fallen to 544,000 units.
And it’s not just units. Now we’re seeing prices fall as the median new home price dropped 3.6% to $309,700, which is 3.1% lower than at this time last year. The huge gap between fewer units sold and the fall in prices shows that we could have more pain ahead.
Oil Drops Below $50, then Rebounds… Oil prices fell as U.S. crude oil inventories rose, but then prices rebounded after Russia acknowledged the value of supply cuts.
What it means – The game is on! After worries over Venezuela and Iran didn’t pan out, the oil market found itself over-supplied and facing weak demand growth next year. Something had to give, and that something was price.
Now, Saudi Arabia and other national producers are struggling with falling revenue that’s not enough to plug the gaps in their federal budgets. OPEC members would like to go back to the supply quotas from 2016, but they’re not sure the Russians will agree, which is why the recent statements from the Kremlin moved the market. But beware! U.S. producers are pumping a record amount, more than 11.5 million barrels per day, and are on track to produce more than 12 million barrels per day in 2019.
OPEC, Russia, and the other conspirators will probably cut production, but U.S. producers will dampen some of the gains. Expect oil back in the $60s.
Natural Gas Prices Reach Multi-Year High, or Fall Below Zero, Depending on Where You Are… The recent cold snap pushed natural gas prices much higher, but so much is being produced that at the point of production gas suppliers are paying storage companies to take the fuel.
What it means – Natural gas isn’t oil. The international market for oil is normalized, with only a few outliers because of transportation issues. Oil trades for about $12 per barrel near the Canadian tar sands, and at $40 per barrel in the Permian Basin of Texas. But natural gas remains regional. Prices in the U.S. can be $3 per million BTU while the Japanese and Koreans pay $9. It’s all about transportation. But even though this spread has always existed, the recent situation in the Permian Basin has spun out of control.
As oil producers recover more natural gas, which are commonly found together, they must either flare it (burn it off) or sell it. But so much has been recovered that transport companies can’t handle any more. This has driven the price of natural gas in the area below zero, where producers must pay transportation companies to take their excess inventory.
With so much oil flowing in the U.S., the price of natural gas should fall in the weeks or months to come. We won’t be able to export enough in early 2019 to ease the supply glut. When we get warm weather expect natural gas prices to fall back to earth.
Number of Illegal Immigrants Living in U.S. Falls to Lowest Level in Decade… After peaking at 12.2 million in 2004, the number of illegal immigrants living in the U.S. fell to 10.7 million in 2016.
What it means – In the early 2000s there were a lot of questions about illegal immigration. Demographics foretold the coming downturn in 2008-2010 would take care of it. That happened. Net illegal migration fell below zero and remains that way. More Mexican nationals leave the U.S. than arrive, which is why the number of illegal immigrants in the U.S. continues to drop, according to the Pew Charitable Trusts. But even though the total fell, there’s still one group that is arriving in greater numbers, those from Central America. As the situations in Honduras, Guatemala, and El Salvador worsen, more citizens from those countries make the long, dangerous trek to our borders.
Thanksgiving Weekend Sales Point to More Holiday Spending… The National Retail Federation expects consumers to increase their holiday spending by 4.8% over last year.
What it means – Foot traffic at brick-and-mortar stores fell 6.6% over the holiday weekend, but online sales, even for traditional stores, shot up by more than 20%. The result was a mixed bag. Revenues are up, but earnings might suffer. Investors worry that online sales are more susceptible to price matching, with suppliers all gravitating to the lowest price. The concerns led investors to sell off retailers such as Target and Nordstrom even as those companies posted strong sales.
Data supplied by Dent Research/Delray Beach Publishing
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