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Fed Points Toward Taper, Market Bids Up 1%

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We have seen buyers entering into a market stretched to the downside after Monday’s big sell-off on China economy concerns (that have since cooled off) and ahead of the Fed report on monetary policy. Chips were being put on a positive message coming from the Fed, and their gambit paid off: markets jumped to session highs on the release of a new Fed “dot plot” and a clear message about tapering asset purchases soon, likely by the next meeting in early November.

Thus, though we’re still down for the week thus far, both the Dow and the S&P 500 have snapped four-day losing streaks, +1.00% and +0.95%, respectively. The Dow gained back 339 points on the day, while the S&P moved back to just under 4400. The Nasdaq followed suit on the day, +1.02% or 150 points, while the small-cap Russell 2000 outperformed the field for the day, +1.48%.

In his press conference following the Fed policy meeting, Chair Jay Powell made the point that it is “more important to do it right than fast.” He was talking about when to taper the asset purchase program keeping the U.S. economy currently awash in cash. He said, “If the economy continues to progress, we could move on to the taper by next meeting.” Powell would first like to see a “decent jobs report,” by which he means for the month of September, though many on the Fed committee feel jobs goals have been met.

The dot-plot for raising interest rates looks fairly mild across the board. Of course, the tapering program will have had to end already — suggestions are this could resolve by June 2022, at which point rates may begin to lift off. Nine voting Fed members want at least one hike in ’22, with three hikes expected in 2023. By 2024, we should have bottom interest rates between 1-2.75%.

Gross Domestic Product (GDP) predictions are for +5.9% growth full-year 2021, slowing to +3.8% (still solid) in 2022. The Unemployment Rate is expected to drop to 4.8% in 2021 to +3.8% in 2022. By 2023, the Fed expects a +3.5% unemployment rate: in short, back to very good pre-Covid levels. These are figures that would not require a backstopping of the economy, and may be able to take incremental rate hike in stride.

Existing Homes Sales for August reached 5.88 million, right in-line with expectations, down -2% month over month. Existing home supply fell -1.5%, to 1.29 million and -13% year over year. All four regions shrank somewhat last month, from -0.8% in the West to -1.4% in the Midwest and Northeast. Existing home sales by price fell -20.3% on homes priced between $100-250K; for homes over $1 million, prices rose +40% year over year.

Speaking of home sales, new home developer KB Home (KBH - Free Report) posted a bottom-line meet and a top-line miss in its Q3 earnings report after today’s closing bell: $1.60 per share was exactly in-line with the Zacks consensus, on $1.47 billion in sales, which missed the $1.56 billion estimate. Closing housing sales did not happen as fast as expected in the quarter, due to supply chain and labor shortage issues. Deliveries were +35% from a year ago.

Shares of KB Home dropped around a third of a percent (after dropping -2% directly on the news), still trading +22.3% year to date. The luxury homebuilder’s average price per new home sold rose 11% to $426,800. The company has had a good track record on the earnings front, tarnished only slightly by today’s meet; it has only missed on earnings expectations once in the past five years.

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