On the surface, the Federal Reserve’s big meeting this past week delivered what many people expected: more delays in cutting interest rates.
Inflation is not clearly coming down on a nice sustained basis, the way the Fed’s interest-rate deciders want. So, they want to wait.
The cynic might say, “Well, they’re just sitting on their hands because they don’t want to be wrong.”
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For investors, the operative word might just be frustration.
But they may have an out.
The bond market may have started doing the rate cutting for the Fed. If so, bonds and housing may add more fuel to the bonfire started by the excitement over chip giant Nvidia (NVDA) and artificial intelligence.
The week ahead is an anomaly. Markets will be closed Wednesday as the United States celebrates the Juneteenth holiday.
The importance of the 10-year yield
Housing is affected by supply, which is constrained, and by the cost of money. That’s been coming down.
You can see what’s happening with the price of money two ways:
In the yield of the 10-year Treasury note. The 10-year note yield has dropped from just under 4.5% on April 29 to 4.228% on June 14. You can also see it in what’s going on with the iShares 20+ Year Treasury Bond exchange-traded fund (TLT) . The ETF acts as a proxy for the 10-year yield. When rates go up, the price falls. When rates fall, the price rises.
The 10-year yield is the biggest determinant of mortgage rates in the United States When the yield pushed higher in the summer of 2023 and finally topped 5% in October, home sales dropped, and stocks cratered.
The price of the ETF, meanwhile, fell 21% from as high as $104 almost a year ago to $82.42. on Oct. 23.
The next day, bargain-minded bond traders began to snap up Treasury securities because they offered a fat yield.
As bond prices jumped, rates necessarily had to fall, and that set off last fall’s big stock market rally.
The 10-year yield fell to just under 4% early this year as Wall Street giddily celebrated their collective belief the Fed was about to cut rates, maybe as many as 7 times in 2024.
Homes starting at a half million dollars in Lexington Waters in Blaine, Minn.
Bond traders have begun to push yields lower.
Except all those rate cuts didn’t happen.
Inflation reports issued in January and February started to suggest inflation might be lower but really wasn’t under control.
And the Fed, whether Chairman Jerome Powell or Minneapolis Fed President Neel Kashkari (and many others), started to warn inflation had to ease sustainably (without much specificity on what “sustainably” meant). There was even talk maybe rates would be raised again.
In April, stocks fell 4%, and markets and traders turned glum, even churlish, as the 10-year yield slowly moved higher, reaching 4.6% on April 29.
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Then, the bargain hunters, sending consumers are cutting back, jumped in again, pushing the 10-year yield down to 4.2% by this past week. The price on the Treasury ETF jumped 7.8% by Friday.
And the rate on a 30-year mortgage fell with rates. It hit 7% on Friday.
Brokers are fielding calls from home buyers. Home sellers are sprucing up their properties and, well, maybe . . .
And one should be patient.
Housing may be the market star of the week
This week features important earnings reports from two big home builders:
Lennar (LEN) , one of the biggest volume home builders, on Monday. The analyst estimate is $3.20 a share, up from $2.94 a year ago.On Tuesday, KB Home (KBH) , another big builder that targets young and first-time buyers, reports its results. The analyst estimate is $1.78 a share, down from $1.94 a year ago.
Both companies have been able to make sales since the Federal Reserve started raising rates in 2022 to fight inflation.
The reason: They’re big enough to be able to raise cash to subsidize the mortgage payments for buyers for up to a few years. But, especially for KB Home, the result has pressured earnings.
Lennar shares are up 4.6% this year with a pretty wild ride. They reached $172, but then tumbled 14% on the rate-increase talk. KB Home shares are faring better, up 9.5% for the year, but they’ve experienced similar whiplashing in March and April.
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More housing numbers ahead
In addition, three important housing reports are due:
The NAHB Wells Fargo Housing Market Index, which track builder sentiment. The May report was weak and revealed that 25% of builders were cutting prices to make sales. Housing starts and building permits, due before Thursday’s open from the U.S. Census Bureau. Existing-home sales, released by the National Association of Realtors, due Friday.
Outside housing is the Commerce Department’s widely watched monthly retail-sales report for May. It’s due Tuesday. It’s expected to show a small gain.
Also reporting earnings this week
Monday: Furniture maker La-Z-Boy (LZB) on Monday. Tuesday Office furniture maker Steelcase (SCS) on Thursday: Information consulting giant Accenture (ACN) ; Supermarket giant Kroger (KR) .
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