The Fed Is Willing To Push Unemployment Higher To Fight Inflation… In an interview with the Wall Street Journal, Fed Chair Powell reiterated that the central bank is committed to lowering inflation, even if it means a bit more unemployment.
What it means— The central bankers are doing everything they can to convince investors that they will stay the course, raising rates and shrinking their balance sheet, until inflation falls to acceptable levels. Powell even went so far as to say that they’d accept higher unemployment in exchange for lower inflation, the exact opposite of what the bankers said in the fall of 2020.
“We know that this is a time for us to be tightly focused on the time ahead and getting inflation back down to 2%. No one should doubt our resolve in doing that. What we need to see is inflation coming down in a clear and convincing way.”
We’re still not convinced and some of the regional Fed presidents aren’t either. Atlanta Fed President Bostic commented that pausing rate hikes in September would be reasonable. KC Fed George said inflation will be the determining factor after rates hit 2% expected by August.
The Fed is squeezing home buyers and causing investors to puke as falling liquidity sucks some of the life out of equities. The Fed’s ability to affect everyday inflation is muted because normal household expenses are not driven by borrowed money. Expect inflation to fall a bit due to the base effect but remain stubbornly high due to housing and energy costs. Expect the Fed to stay the course when inflation doesn’t respond as desired. For investors, this means more volatility ahead.
Housing Starts Fell 0.2 in April, Down Slightly from 16-Year High in February… Housing starts dipped to an annualized pace of 1.72 million units last month, as higher mortgage rates pushed some buyers out of the market.
What it means— Overall housing rates eased a bit, but there’s a different story in the details. Single-family housing starts dropped like a rock, falling 7.3% to an annualized rate of 1.1 million, while multi-family housing starts jumped 17% to an annualized rate of 612,000, the highest level since 1986.
Single-family housing starts are just 3.7% higher than this time last year, while multi-family starts are up 16.3%. Builders are telling us that they see incredible overall demand for housing but declining affordability, which should push more people into rentals. The quick shift from single-family units to multi-family units should keep the market from becoming overrun with supply, which could keep prices from falling too dramatically as buyers and sellers adjust to the highest mortgage rates in more than a decade.
April Existing Home Sales Fell 2.4%, Are Down 5.9% Over Last Year… This was the third consecutive month of declining existing home sales.
What it means— As with new homes, it’s all about supply. Sales are trending lower, but so is inventory. There were 1.03 million units for sale last month, down 10.4% from the same time last year. At the current sales rate, a 2.2-month supply was available in April. A balanced market has a 6-month supply, and just before the pandemic there was a 4-month supply. The tight inventory kept prices up. The median sales price for an existing home hit another record last month at $391,000, up 14.8% over April 2021.
Supply is the difference between 2007 and today. Back then, many people used creative financing to buy multiple homes. When they couldn’t make the payments, they flooded the market with inventory. At the same time, builders were constructing thousands of units, which just added to the misery. Today, builders are swiftly adjusting what they construct and so far, potential sellers don’t appear to be under pressure. Expect sales and inventory to fall in tandem.
April Retail Sales Up 0.9%, March Numbers Revised Higher… Consumers increased their spending again in April, marking four consecutive months of higher outlays.
What it means— If the goal is to get consumers to spend less, the retail sales report shows that the Fed isn’t doing a very good job. We kept buying stuff even as prices marched higher, but that’s not unexpected. Who wants their standard of living to go down? We’ve switched to buying more store brands and reduced our driving a bit, but that’s about it. Walmart’s earnings dropped with the stock dropping more than in 35-years. Among dealing with higher costs, Walmart reported a shift in spending from goods to cover higher grocery costs.
If wage gains slow down and inflation remains high, retail sales will drop, and it won’t be pretty. There will be general backlash as consumers try to figure out who’s taking their cash and why the people in charge, politicians and the Fed, can’t fix it.
Florida Woman Really, Really Didn’t Want a Traffic Citation… A woman in Martin County, Florida, took off during a traffic stop, intentionally ramming into a sheriff’s office vehicle as she fled. The woman eventually hit a civilian pickup truck and then another sheriff’s vehicle before coming to a stop. When deputies approached the vehicle, the woman threw a fake snake at them.
Data supplied by HS Dent Research
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