Friday Market Update for the Week of October 29th 2021

Happy Friday, Brian Manning here with the weekly update. My gosh, we have all kinds of stuff to talk about this week. So a little quick recap from last week. So last week, we had Fed President Jerome Powell kind of changing his stance on inflation and saying that, okay, maybe it’s not as transitory as they thought it was originally. I mean, the Federal Reserve just seems rather disconnected right now, saying that they kind of hoped that supply chains will work themselves out. I mean, I don’t know what they plan on delivering right now, inflation seems to be moving into a problem everywhere. You look at like Amazon, for example, Amazon said that based on inflation and cost of moving packages around, that in Q3, it cost them an additional $2 billion. And in Q4 this year, they think it’s going to cost them an additional $4 billion based on supply chain issues. So I don’t know what the Federal Reserve is looking at, but clearly, we’re seeing some challenges here.

Federal Reserve really has two tools that they can use to hedge inflation. So number one is the Fed funds rate, which is a rate that they can increase, and the other is their bond buying program. So right now, we’re still actively in the bond buying program. It’s a version called quantitative easing, it’s really kind of likely anticipated that at their meeting here in November, they’re going to announce the tapering out of this program. The Federal Reserve’s balance sheet right now, because of their bond buying program is at $8.5 trillion. Even if the Federal Reserve announces this, and they start their tapering in the month of December and probably will run off through the month of June, they’re still reinvesting on a monthly basis. So we’re probably going to see their balance sheet go from like $8.5 to almost $9 trillion. So interesting to see what’s going to happen there. But they probably need to start looking at hiking rates, because inflation is definitely going to be hotter. Hiking rates is not necessarily bad. There’s this misnomer out there. I hear people talk about this all the time. Oh, the Federal Reserve is going to raise rates and mortgage rates are going to go up. That is not the case. So the Federal Reserve controls the Fed funds rate. And the purpose of this is if they increase this rate is to cool off consumer spending. It’s really inflation that causes mortgage rates to go up because inflation erodes the long term profit of an interest rate associated with the mortgage. So it wouldn’t really be bad to see the Federal Reserve raising rates, it probably would actually help calm down mortgage rates, but right now, the Federal Reserve has that nowhere in the future so we’ll have to wait and see what happens. Tuesday this week, we got new home sales. For the month of September, new home sales were up 14%, so a really strong report.

We also got a Case Shiller. Case Shiller showed the home appreciation was up 1.2% on a month over month basis, and on a year over year basis up 19.7%. So interesting to see that the year over year basis has actually come down a little bit. I mean, 19.7% appreciation year over year is a ridiculous number. But I’m wondering now if we’ve kind of hit the apex on that annual appreciation that was at the 20 or so percent range. So we’ll have to wait and see what happens there. Wednesday this week, we got consumer confidence. So in the Consumer Confidence Report, there’s a component in regards to homebuyers and the number is up in regards to families that are going to be looking to purchase a home in the next six months. So we’re still going to see a very strong and robust housing market. Thursday this week, we got pending home sales. Pending home sales for the month of September were down 2.3%. That’s coming off the heels of a really strong report in August, I think August was up like 8%. And also keep in mind that inventory is still down 13% right now. So we’re not too shaken by the pending home sales report, just because of everything I outlined.

Also Thursday this week, we got the first reading of GDP for the third quarter. So that was at 2%. Depending on who you listen to, we’re looking at something that’s higher than was expected, something that was more in line. But if you look at the components of GDP, one of the biggest indicators of this was companies building up their inventory. Companies are building up their inventory because of their supply chain issues, so if you didn’t have so many supply chain issues, you wouldn’t have companies building up their inventory to get into the holiday, you probably would’ve seen a less rosy of a report for GDP. So we have to wait and see if that’s going to be impacted in the future.

Today, Friday, we got the PCE. So PCE is the personal consumption expenditure. This is the Federal Reserve’s favorite gauge of measuring inflation, and the core rate on a month over month basis was up two tenths of a percent and the headline rate, on a year over year basis moved from 4.2% to 4.4%. It’s kind of crazy because the Federal Reserve used to say, oh, our limit that we want to see on inflation is 2%. And then once we see 2%, we’re going to start hiking rates because we want to keep it, really cap it at 2%. Here we are moving from 4.2% to 4.4% and the Federal Reserve is not really sure what to do there. I mean, I don’t envy their position but you know, it’s probably not a great spot to be in. The other thing we can’t really figure out is why does the Federal Reserve love PCE so much?

The alternative report to this is what’s called the CPI. That’s the Consumer Price Index. The difference is this, the CPI report in their factoring of inflation takes into account out of pocket medical expenses for all of us, and cost of housing. I mean, I don’t know about you, but everywhere I look people spend money out of their pocket for medical expenses, people spend money out of their pocket for housing. So it kind of seems crazy when you have a housing market running up the way that it has been, when you’re looking at a gauge of inflation not looking at these items and choosing a report that ignores medical expenses and housing expenses. So there is a small gauge in the PCE for housing, but it’s not really much. But what’s interesting is if you look at the CPI, CPI is running hotter by about 1%. Also, I’m not sure where the Federal Reserve is looking, but housing itself and especially rents is going up. On average, depending on the report that you look at, rents have increased by 5% to 6% per year. And some of the reports on the government side only show they’ve gone up 2%. So there definitely seems to be a little bit of a disconnect there. I know this is a lot of information this week. Next week is going to be chock full of information as well as the first week of the month, which means it’s going to be employment reports, next Wednesday we get the ADP report, next Friday we get the BLS. These are definitely going to be market movers. They always are, but especially right now with what’s happening.

I’m around all weekend. If you have any questions, let me know. If you want to get pre approved, want to run some numbers, need just a strategic buyer consultation, give me a call anytime, seven days a week. I’d love to help you in any way I can. Happy Friday. Have a great day!