The Fed Makes No News

There were no surprises from the Federal Reserve today.

The central bank did raise its overnrnight interest rate, as promised. The target range for the federal funds rate is now 2% to 2.25%, up a quarter-point.

It’s the Fed’s third such move of 2018, with another forecast before year’s end. The present plan still includes another three rate hikes in 2019.

The Federal Open Market Committee’s post-meeting statement did include one surprise, the removal of the word “accommodative” as it applies overall monetary policy.

I guess that means things are getting back to “normal” again.

The Fed’s estimate for gross domestic product growth in 2018 brightened slightly to 3.1%. Inflation should remain around its 2% target for the foreseeable future. And unemployment looks set to drop to 3.7%.

Well ahead of today’s move, Treasury yields ticked up into the 3% range.

The yield on the long bond tested four-year highs near 3.25%, while the 10-year hit a seven-year peak near 3.09%.

Maybe China was selling from its stockpile of U.S. governrnment debt.

Whatever the reason, my system triggered a trade alert, identifying the move as an overreaction.

Yields backed off after the initial move higher and then jumped again, the 30-year re-testing 3.25%, the 10-year touching 3.11%.

These were interesting moves.

Inflation data is weakening, but rates are moving higher.

We’ve seen similar spikes since Donald Trump’s victory in the November 2016 election.

The long-term yield has bounced above 3.20% a handful of times.

We’ll see if it’s there to stay…

But let’s face it: Markets are getting jittery, and traders are overreacting to… just about everything.

Good; this is the type of action we want. Overreactions create mispricing.

And mispricing creates opportunity…

Is the Foundation Cracking?

Today’s Fed decision soaked up most of the attention that wasn’t focused on the Supreme Court confirmation soap opera playing in D.C.

But there are some interesting and important things happening in the housing market.

August new home sales came in slightly below the estimate of 630,000 units. More concernrning is the downward revision to July’s figures. There were 21,000 fewer units moved than initially thought.

That’s on top of a 2.4% decline in median prices, as builders are apparently starting to offer discounts.

New home sales are big. Buyers fill new homes with furnrniture and appliances, and they finish off the property with landscaping and other personal touches.

This stuff ripples through the economy.

And the ripples are weakening.

Existing home sales missed expectations for the fifth month in a row. Instead of a small increase, sales were flat. Single-family and condo re-sales were both unchanged.

Existing home sales were down 1.5% compared to August 2017, unchanged from last month. Average home prices were down 1.7%.

August new home starts and permits were another mixed bag.

A “housing start” means a builder has begun excavation, that construction will likely be completed, and the home will come to market for eventual sale.

Starts were up 9.2% on the month, well above expectations.

Permits – an indication of intent to begin excavation – were down 5.7%, a big disappointment.

A beat in permits isn’t as meaningful because builders can always pull the application and not build. But a miss suggests builders aren’t confident in future new home sales.

A Spike to Like

Overall, recent housing data aren’t all that comforting, especially since mortgage rates continue to climb. Weakening demand is not a good sign for home prices.

As home prices fall, so goes household wealth. And that’s a big negative for the economy.

The Fed is expected to hike rates again in December.

But, if housing continues to weaken and that spreads to other parts of our economy, another hike could be the catalyst to a big downturnrn.

And that means a serious spike in volatility, particularly in the Treasury market.