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Markets Down on Stagflation Concerns; KBH Misses on Q1
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After seeing disparate performances on the major indexes since the bounce-back from last week began, we see a nice, even disbursement of trading today — the only problem is, they’re all uniformly down: the Dow -1.29%, the Nasdaq -1.32% and the S&P 500 -1.23%. Basically a rounding error between them, but now we’re down two of the three days this week.
Raising interest rates — which the Fed started last week and will continue to do throughout this year and next — while inflation continues to climb, curbing demand as consumers adjust their appetites to coordinate with their pocketbooks, runs the risk of developing into a dreaded economic circumstance: stagflation. This is where what you’ve got stays pat while what you want grows ever more expensive. And that creates a breeding ground for an even worse word for the economy: recession.
Because the Fed waited until full employment came within striking distance — and with it, wage price increases, especially on the lower tiers of the American workforce, which the Fed would argue is a net positive — inflation was let off the chain, and still hasn’t returned to the yard. Now, faster interest rate increases are becoming increasingly higher, and we are seeing unquestioned bearishness in the bond market. The Fed is also set to start draining $9 trillion in assets off its balance sheets in the coming meetings. Tightening is not only on the way, it’s here.
Long-term, let’s be clear, this is the only responsible move to make. Whether or not the Fed waited too long to taper asset purchases and begin raising rates (it did), now the objective is to keep employment levels at historically high rates while working to bring inflation under control. It will likely be more than a year or two before we’re back at the optimum 2% inflation, but getting headed in that direction is the key here.
As mentioned earlier today in this column, the housing market has already seen some effects of this initial interest rate hike of 25 basis points (bps): as mortgage rates rise (the 30-year fixed is already up a whopping +44% year to date), this will eventually put a cap on home prices rising. Demand is still strong, but we may see a drop-off now that the music has stopped and the open chairs all have higher-priced mortgage rates attached to them.
New Home Sales for February — in other words, prior to interest rate hikes affecting the housing market — came in notably lower than expected: 777K versus 805K analysts were looking for, compared to a downwardly revised 788K the previous month. These are seasonally adjusted, annualized units, and basically dead-center with monthly averages over the past five years. But it would appear high prices have already put a crimp in the home-buying market, although this will be easier to ascertain with forthcoming data.
LA-based homebuilder KB Home (KBH - Free Report) reported Q1 earnings after the closing bell Wednesday, with disappointment coming from both top- and bottom-line results: $1.47 per share missed the $1.52 expected, on $1.40 billion in sales which was short of the $1.50 billion in the Zacks consensus. Revenues grew +23% year over year, but the company reports only its second earnings miss in the past five years. Shares are down -4% in late trading, now -16% year to date.
Image: Bigstock
Markets Down on Stagflation Concerns; KBH Misses on Q1
After seeing disparate performances on the major indexes since the bounce-back from last week began, we see a nice, even disbursement of trading today — the only problem is, they’re all uniformly down: the Dow -1.29%, the Nasdaq -1.32% and the S&P 500 -1.23%. Basically a rounding error between them, but now we’re down two of the three days this week.
Raising interest rates — which the Fed started last week and will continue to do throughout this year and next — while inflation continues to climb, curbing demand as consumers adjust their appetites to coordinate with their pocketbooks, runs the risk of developing into a dreaded economic circumstance: stagflation. This is where what you’ve got stays pat while what you want grows ever more expensive. And that creates a breeding ground for an even worse word for the economy: recession.
Because the Fed waited until full employment came within striking distance — and with it, wage price increases, especially on the lower tiers of the American workforce, which the Fed would argue is a net positive — inflation was let off the chain, and still hasn’t returned to the yard. Now, faster interest rate increases are becoming increasingly higher, and we are seeing unquestioned bearishness in the bond market. The Fed is also set to start draining $9 trillion in assets off its balance sheets in the coming meetings. Tightening is not only on the way, it’s here.
Long-term, let’s be clear, this is the only responsible move to make. Whether or not the Fed waited too long to taper asset purchases and begin raising rates (it did), now the objective is to keep employment levels at historically high rates while working to bring inflation under control. It will likely be more than a year or two before we’re back at the optimum 2% inflation, but getting headed in that direction is the key here.
As mentioned earlier today in this column, the housing market has already seen some effects of this initial interest rate hike of 25 basis points (bps): as mortgage rates rise (the 30-year fixed is already up a whopping +44% year to date), this will eventually put a cap on home prices rising. Demand is still strong, but we may see a drop-off now that the music has stopped and the open chairs all have higher-priced mortgage rates attached to them.
New Home Sales for February — in other words, prior to interest rate hikes affecting the housing market — came in notably lower than expected: 777K versus 805K analysts were looking for, compared to a downwardly revised 788K the previous month. These are seasonally adjusted, annualized units, and basically dead-center with monthly averages over the past five years. But it would appear high prices have already put a crimp in the home-buying market, although this will be easier to ascertain with forthcoming data.
LA-based homebuilder KB Home (KBH - Free Report) reported Q1 earnings after the closing bell Wednesday, with disappointment coming from both top- and bottom-line results: $1.47 per share missed the $1.52 expected, on $1.40 billion in sales which was short of the $1.50 billion in the Zacks consensus. Revenues grew +23% year over year, but the company reports only its second earnings miss in the past five years. Shares are down -4% in late trading, now -16% year to date.
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