Pre-market stocks: don’t pay too much attention to what Jerome Powell says today
The problem? The Fed itself has indicated that it does not know yet.
« Because we’re uncertain, we’re desperately waiting for some sort of signal from the Fed, » David Bianco, director of investments for the Americas at DWS, told me. « But they don’t have clarity on that themselves. »
This is the main reason why US equities rallied this summer. The S&P 500 is up about 15% from its June low.
But when Fed officials actually talked about their plans, they made it clear that they were in wait-and-see mode.
“We expect continued increases in the target range for the fed funds rate to be appropriate,” Powell said in late July. « The pace of these increases will continue to depend on incoming data and the changing outlook for the economy. »
In short, the Fed’s decision at its next meeting on September 20-21 will depend on the economic numbers that are expected to arrive in the coming weeks, including the August jobs report and the latest consumer price index.
The most recent edition of the Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation, will be released later this morning. Core inflation, which excludes volatility in food and energy prices, is expected to have eased to 4.7% in July from 4.8% the previous month.
“I don’t think we should try to read too much of what’s being said in Jackson Hole,” Bianco said. « They’re just as insecure as we are about these things. »
Wall Street View: Investors now believe the odds of the Fed raising rates by three-quarters of a percentage point for a third straight meeting is over 60%. A week ago, they put the odds at 47%.
This indicates that the markets could be choppy in the coming weeks as traders try to determine how aggressive the Fed will be. But given how much time is left on the clock for the situation to change again, investors shouldn’t expect Jackson Hole to produce a light bulb moment.
Mortgage rates are on the rise again
Latest: The 30-year fixed-rate mortgage averaged 5.55% in the week ending Aug. 25, up from 5.13% the previous week, according to Freddie Mac. That’s almost double what it was this time last year, reports Anna Bahney, my CNN Business colleague.
After starting the year at 3.22%, mortgage rates rose sharply in the first half of the year, peaking at 5.81% in mid-June. Since then, concerns about the economy and the Federal Reserve’s mission to fight inflation have clouded the picture.
The combination of higher mortgage rates and slowing economic growth has weighed on the housing market, said Sam Khater, chief economist at Freddie Mac.
“Home sales continue to decline, prices are moderating and consumer confidence is low,” he said. « But, amid falling demand, there are still potential buyers on the sidelines waiting to get back into the market. »
From top to bottom: Mortgage rates tend to follow rates on the benchmark 10-year Treasury, which rose last week. Rates have wobbled in recent weeks as investors digested a slew of data that shows the economy is resilient in some areas and softening in others.
After soaring in the first part of the year, new mortgage payments fell slightly in July compared to June, according to a Mortgage Bankers Association survey.
Still, the cost of a mortgage is rising sharply, which could make it harder for buyers to spend their money on other things.
A year ago, a buyer who staked 20% on a $390,000 home and financed the rest with a 30-year fixed rate mortgage at an average interest rate of 2.87% had a monthly mortgage payment of $1,294, according to Freddie Mac. Today, a homeowner buying a house at the same price with an average rate of 5.55% would pay $1,781 per month. That’s an increase of $487.
Even dollar stores are feeling the pinch of inflation
The companies reported solid sales increases for the second quarter on Thursday, my CNN Business colleague Paul R. La Monica reports. But both companies have expressed concerns about the impact inflation could have on future results.
Dollar Tree CEO Mike Witynski said in the company’s earnings release that buyers are « pressured by higher costs for food, fuel, rent and more. »
« Consumers continue to be burdened by levels of inflation not seen in decades, » he told analysts. The company’s suppliers are also affected by inflation.
Meanwhile, Dollar General CEO Todd Vasos described the quarter as a « period of inflation and economic uncertainty. »
On the radar: Dollar Tree is also facing backlash from customers following last year’s controversial decision to raise prices, a move that prompted some consumers to call the chain « 1.25 $Tree ».
Yet they are faring better than other retailers as households rethink their budgets. Dollar Tree shares fell 10% on Thursday but are still up 6% year-to-date. Dollar General’s stock is up more than 4% in 2022.
The PCE price index arrives at 8:30 a.m. ET. Fed Chairman Jerome Powell’s Jackson Hole speech will follow at 10 a.m. ET.
Coming next week: How is the US labor market holding up? Economists expect to hear that 290,000 more jobs were added in August, another strong showing after more than half a million jobs were added in July.