Homebuilder sentiment: Foundation cracks under weight of mortgage rates

HOMEBUILDER SENTIMENT: FOUNDATION CRACKS UNDER WEIGHT OF MORTGAGE RATES (1105 EDT/1505 GMT)

The mood amongst U.S. homebuilders took an unexpected dour turn this month.

The National Association of Home Builders' (NAHB) Housing Market index (USNAHB=ECI) slid five points to land at 45 - the lowest since April - defying analyst expectations that it would hold firm at a neutral 50, which is the dividing line between optimism and pessimism.

Coming on the heels of a 7-point drop in August, the residential construction sector is feeling the stress of rising mortgage rates; the average 30-year fixed contract rate has been above the 7% level since early August, and applications for loans to purchase homes are down 27.5% from a year ago, according to the Mortgage Bankers Association.

"High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower," writes Robert Dietz, NAHB's chief economist.

Home construction initially benefited from rising mortgage rates, which resulted in a dearth of pre-owned homes on the market and prompted a demand shift to new builds.

But amid tightening credit conditions and downbeat consumer sentiment, that particular party appears to be over.

The index "has broken sharply to the downside in the past two months as the surge in mortgage rates, and the subsequent drop in mortgage applications to their lowest level since 1995, has made homebuilders nervous," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

A current-month indicator, NAHB is among the more up-to-date housing market metrics.

But for a glimpse into where investors see the sector six months to a year down the road, look to the stock market.

Through that lens, market participants appear to be seeing a Fed pivot in their crystal balls, which should help bring borrowing costs back down to earth.

Over the last 12 months, the S&P 1500 Home Building index (.SPCOMHOME) and the Philadelphia SE Housing index (.HGX) have risen 61.0% and 43.8%, respectively, handily outperforming the broader S&P 500's 14.9% advance over the same period:

(Stephen Culp)

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FALSE INFLATION NARRATIVES ABOUND BUT CENTRAL BANKS ARE NOT BEING DECEIVED (1041 EDT/1441 GMT)

Two opposing inflation concerns have been testing investors nerves since early summer, Capital Economics' (CE) Group Chief Economist Neil Shearing pointed out in a note on Monday.

On the one hand, China's deflationary pressure has blown the whistle on the world's second-largest economy's struggle to revive demand, facing an era of much slower economic growth.

On the other hand, resurgent energy prices put on the table the risk that a renewed rise in inflation across advanced economies could hamper central banks' in their price cooling task.

Both narratives gave rise to headlines easy to overstate, Shearing said.

China's economy is not yet out of the woods but August data revealed a pick-up in activity, driven by a consumer spending rise.

Secondly, even if higher-for-longer oil prices could bleed into core inflation as companies pass on higher energy costs to consumers, disinflationary forces are likely to dominate in a scenario where most advanced economies may slip into mild recession over the next six months, Shearing added.

But central banks look beyond these inflationary games and seem to stand firm with their hawkish rhetoric.

The Bank of England is likely to follow in the footsteps of the European Central Bank (ECB) on Thursday and lift interest rates by a further 25 basis points.

Meanwhile, the Federal Reserve is expected to pause on Wednesday, but Chairman Powell is unlikely to present a dovish tilt, "as he would like to have the option to raise rates again without jarring the market", said Erik Weisman, Chief Economist and Portfolio Manager of MFS Investment Management.

Precisely, at this stage of the monetary cycle, with interest rates about to reach a peak, the last thing that policymakers want to do is to dilute the effect of prior tightening by sending mixed messages that lead to a loosening of financial conditions, Shearing highlighted.

Still, CE suspects that the Fed, ECB and Bank of England would not probably hike anymore, after this week.

(Matteo Allievi)

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S&P, NASDAQ SLIGHTLY UP; FOCUS ON FED MEETING (1025 EDT/1425 GMT)

Wall Street shares are mixed in choppy trading, with traders awaiting a widely-anticipated pause on interest rate hikes from the Federal Reserve.

Monday's rise in U.S. Treasury yields is undermining some major growth names including Microsoft MSFT. Meta Platforms META and Alphabet GOOG were down earlier in premarket trading, but are now up on the day.

Chip stocks such as Marvel Technology MRVL, Broadcom AVGO, Lam Research LRCX, and Qualcomm QCOM recovered from premarket losses. Nvidia Corp NVDA, however, remains down.

David Rosenberg, founder and chief market strategist at Rosenberg Research, thinks that the U.S. equity market is in a spot of trouble.

"The S&P 500 and Nasdaq aren't far off levels at this point from triggering a highly bearish signal," he writes in a research note. "The underlying trend is down. And what about the small caps? Not too good."

The Fed meeting this week is also in focus, with traders, more or less pricing the fact that the Fed is done raising rates. The rate futures market is pricing in a roughly 70% chance of a pause at the November meeting.

Here's an early morning snapshot of assets across financial markets:

(Gertrude Chavez-Dreyfuss)

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HOW TO TRADE THE REST OF THE YEAR (1005 EDT/1405 GMT)

Morgan Stanley's client survey showed most wonder if the rest of the year will bring more of the same mega-cap growth leadership seen so far this year, or if the rally will broaden out to areas that have underperformed this year - value and small/mid cap stocks.

The S&P 500 SPX has risen ~16% so far this year driven largely by a surge in big AI names such as Nvidia NVDA and Meta Platforms META, while Europe's STOXX 600 SXXP is up 7.6%.

According to Mike Wilson, chief U.S. equity strategist at Morgan Stanley, it's too early to pivot to small/mid caps. He recommends defensives and some cyclical sectors, especially energy.

"The sector is historically a late-cycle outperformer... oil demand is strong, production cuts have been significant and our commodity strategists see crude prices underpinned around current level," Wilson says.

The sector's valuation remains "quite attractive" after underperforming from November to July, he notes.

The S&P 500 energy index SPN fell 3% over that period against a near 19% rally in the S&P 500. In Europe, the energy index (.SXEP) fell 0.5% versus a 14% jump in the STOXX 600.

But Wilson notes a difference in approach in U.S. and Europe.

Many U.S. investors believe large cap growth winners will continue to lead in the last quarter if the broad market holds together, while in Europe, value stocks are preferred, mainly due to the absence of large growth stock drivers like in the U.S.

Meanwhile, for next year, most MS says clients expect a recession and are bracing for a more challenging year for risk assets relative to 2023.

(Susan Mathew)

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S&P 500 INDEX: TRADERS BRACE FOR THE FED, CHANGE OF SEASONS (0900 EDT/1300 GMT)

The S&P 500 index SPX edged down last week by just 0.2%. This as traders brace for the results of the latest FOMC meeting this coming Wednesday.

According to the CME FedWatch tool (FEDWATCH), there is a 99% probability that the Fed sits on its hands and leaves rates unchanged at the conclusion of this week's meeting. There is a 1% chance they lift rates by 25 basis points.

Looking out through the rest of the year, the FedWatch Tool is still suggesting the most likely outcome is no change in rates.

In any event, given that the date of this week's FOMC meeting falls within the orb-of-influence of the autumnal equinox, which occurs this coming Saturday, September 23 at 250 AM EDT, the potential for volatility is there.

Proponents of Gann Theory, or methods of technical analysis developed by W.D. Gann, as well as other traders with an astro-focus, may look for either an acceleration of the prevailing trend, or a reversal, around the summer and winter solstices, as well as the fall and spring equinoxes.

Just looking back over the past five-and-a-half years or so, a number of major reversals in the S&P 500 have developed around these potential turn dates: