Financial News for the Week of August 19th, 2022

The third week of August was a busy data week for the U.S., with updates on housing and the consumer for July in financial news. The consumer spent a little more than expected at retailers (omitting auto dealers and gas stations), thanks to a successful Amazon Prime Day event, but housing is continuing to recalibrate to the higher rate environment.

Headline retail sales were flat in July, marking a deceleration from June’s 0.8% month-over-month (m/m) gain. However, the headline measure was dragged down by sales auto & part dealers (-1.6%) and gasoline stations (-1.8%), the latter reflecting lower prices at the pump. Retail sales in all other categories rose a sturdy 0.7% m/m. Similarly, sales in the control group, which strip a couple of more categories from the total and are used in calculating personal consumption expenditures and GDP, were up 0.8% m/m thanks to a boost from sales at non-store retailers (Chart 1). Total CPI inflation was flat in July, so by these measures, real goods consumer spending appears to have had a decent start to the third quarter.

Consumers also spent handsomely at building material and supply dealers last month (+1.5% m/m), a move that went against the grain of the ongoing weakening in housing. Existing home sales fell by almost 6% in July, extending their downward slide from the start of the year to a staggering 26%. Home prices have also been feeling the impact of higher rates, with the median seasonally adjusted home price falling in each of the last two months (Chart 2). The fact that mortgage rates have eased a bit over the past several weeks could provide an opportunity for the housing rout to take a breather. However, the Fed is not done hiking rates, so affordability is likely to remain a meaningful constraint for the foreseeable future. As a result, we expect home sales to continue trending moderately lower through the first half of next year.

Homebuilders have continued to ease off the accelerator amidst this challenging market backdrop, with starts falling 9.6% in July. The weakness in homebuilding over the last several months has been concentrated in the single-family market. A recent sharp decline in homebuilder confidence in this sector suggests that the trend is poised to continue.

The fallout from the downturn in the housing market is only one factor the Fed must consider as it gears up to raise rates again next month in further financial news. Minutes from last month’s FOMC meeting revealed that many members acknowledged the risks that the Committee could tighten the stance of policy by “more than necessary”. In addition, participants judged that as the policy rate is tightened further “it would become appropriate at some point to slow the pace of policy rate increases” to assess the impacts. Markets interpreted this as a signal that the pace of rate hikes would slow soon, but a few Fed officials (i.e., Bullard, voting member, backs a 75-basis point (bp) hike next) appeared to push back against that notion. For now, markets are pricing in a 50-bp hike at the next meeting. Chair Powell’s Jackson Hole speech next Friday will be closely watched to gauge the Fed’s latest thinking as to where rate hikes are headed.

Admir Kolaj, Economist | 416-944-6318