Financial News for the Week of October 21st, 2022

This week brought some calming to global financial markets, helped along by UK policymakers abrupt U-turn on its proposed “mini” budget which had included £45 billion of unfunded tax cuts in financial news. UK Prime Minister Liz Truss resigned on Thursday, leaving the Conservative Party to elect a new leader sometime later next week. Yields on longer duration Gilts were down 50 basis points (bps) on the week, while the Sterling lost a modest 0.5% vis’-a-vis the dollar.

Investors also continued to digest last week’s CPI report, which led to further pressure on U.S. yields. At the time of writing, the 10-year has moved up an additional 30-bps this week to 4.3%, reaching both a new cyclical high and also the highest level since mid-2007. Top of mind on the inflation front, has been the recent turn higher in energy prices. Indeed, since peaking in July, gasoline prices had fallen by nearly 30% through mid-September. However, the recent announcement by OPEC+ members to pare back production quotas has led to renewed pressure on oil prices, which has also pulled gasoline prices higher. In an effort to provide some relief to consumers, the Biden Administration announced this week that they will be digging further into its Special Petroleum Reserve (SPR) and releasing an additional 15 million barrels in December. After including this week’s announcement, the cumulative release through December will total nearly 180 million barrels over the six-month preceding period in further financial news. And its impact on gas prices cannot be understated. The U.S. Treasury estimated that the release of reserves to date has lowered retail fuel prices by as much as 42 cents per-gallon. That has come at the expense of an unprecedented drawdown in the SPR, which will eventually need to be topped up (Chart 1). According to the Biden Administration, this will happen once oil prices fall below $70 per-barrel.

The renewed pressure on interest rates has brought the housing market squarely back into focus. With the 30-year fixed mortgage rate now at 7.25%, buyer affordability has eroded to levels beyond the lows pre-dating the mid-2000 housing crisis.  Demand continues to soften, with existing home sales falling 1.5% m/m to 4.7 million units in September and are now down 23% year-to-date.  No reprieve appears to in sight, as leading indicators such as pending home sales and mortgage applications both point to further weakness in the months ahead.

Beyond the sales side, the combination of rising rates and elevated material costs has also heavily weighed on builder sentiment, with September housing starts falling 8.1% m/m in September. Declines were seen across both the single-family (-4.7% m/m) and multifamily (-13.2% m/m) segments, though the former has disproportionately accounted for most of the pullback year-to-date. Interestingly, the number of homes currently under construction remains at a historical high, as labor and building material shortages have significantly lengthen the time it takes to build a home (Chart 2). Perhaps most worrying is the fact that the number of single-family homes under construction currently sits at a 16-year high. With demand in this segment quickly receding, builders have already started reducing prices and adding additional incentives in an effort to attract buyers. However, with record amounts of new supply still in the pipeline, further declines in home prices are all but certain.

 

Thomas Feltmate, Director & Senior Economist | 416-944-5730