U.S. Economic News:

The U.S. labor market remains resilient despite some deteriorating economic reports, but is losing some of its luster.  The number of Americans filing for first time unemployment benefits jumped by 7,000 to 251,000 last week, the Labor Department reported.  Economists had expected new claims would tick down by 4,000 to 244,000.  Claims have steadily risen since hitting a low of 166,000 in March—the lowest level of claims since 1968.  Meanwhile, the number of people already collecting jobless benefits rose by 51,000 to 1.38 million.  That number remains near historic lows.

Sales of existing homes fell by 5.4% to a seasonally-adjusted annual rate of 5.12 million in June, the National Association of Realtors (NAR) reported.  The reading missed economists’ expectations for a reading of 5.36 million.  This is the weakest level of sales since June 2020, shortly after the beginning of COVID lockdowns.  Compared with the same time last year, home sales were down 14.2%.  The median price for an existing home rose to a record $416,000 up 13.4% from June 2021.  Expressed in terms of the months-supply metric, there was a 3-month supply of homes for sale in June, up from 2.6 months in May.  Before the pandemic, a four-month supply was more the norm.  Lawrence Yun, chief economist at the NAR, stated the drop in existing home sales was “clearly due to the plunging affordability” primarily driven by higher home prices and mortgage rates.

The news from homebuilders mirrored the report from realtors.  Confidence among the nation’s home builders plunged in July, its second-largest drop in the history of the National Association of Home Builders (NAHB) survey.  The NAHB reported its homebuilder confidence index fell 12 points to 55, its seventh consecutive monthly decline.  The decline was much larger than expected.  Economists had expected a reading of 66.  One year ago, the index stood at 80—the latest reading is its lowest since May of 2020.  All three gauges that make up the index declined.  The measure that tracks current sales conditions fell by 12 points, while the component that measures prospective buyer traffic fell by 11.  The gauge that assesses sales expectations for the next six months also fell 11 points.  Builder confidence was weak across the entire country.  In the Northeast confidence fell by 6 points; in the Midwest by 4; in the South by 8; and the West by 12.  NAHB Chairman Jerry Konter, a builder in Savannah, Georgia stated, “Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home.” 

Construction of new homes fell a seasonally-adjusted 2% in June to an annual rate of 1.56 million, the Commerce Department reported.  On annual basis, total housing starts fell 6.3% from the previous year.  Economists had expected housing starts to rise to a 1.59 million rate from June’s initial estimate of 1.55 million.  Richard Moody, chief economist at Regions Financial noted even though demand for homes in the U.S. is cooling, “builders will remain busy for some time working down backlogs of unfilled orders, even allowing for rising cancellations.”  But the drop in housing starts, which follows weak sentiment expressed by homebuilders in July, hints at further gloominess in the housing sector.

A preliminary ‘flash’ reading of the vast services side of the U.S. economy showed a “worrying deterioration”.  S&P Global Market Intelligence reported its U.S. services Purchasing Managers’ Index (PMI) fell to a 26-month low of 47 in July, from 51.6 in the prior month.  Readings below 50 signify contraction.  Also in the report, the manufacturing flash PMI slid to 52.3 from 52.7.  That was the weakest level in two years as well.  Chris Williamson, chief business economist at S&P Global Market Intelligence stated, “The preliminary PMI data for July point to a worrying deterioration in the economy.  Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook.” [1]

The Week Ahead

Investors might want to strap in for numerous high-impact events, the biggest being
the FOMC statement on Wednesday. The Fed is expected to raise rates by another
75bps, but the question remains whether recent economic data has swayed the
committee to ease off going forward. On Thursday, the first look at Q2 GDP will
reveal if the U.S. has fallen into a technical recession. Forecasts call for modest growth
of around 0.5% after Q1’s 1.6% contraction. Then on Friday another inflation update
arrives with June’s Core PCE Price Index, which has declined for three straight months.
It’s also a pivotal week for earnings, with many large U.S. multinationals and
technology stocks reporting. So far, most companies have beaten dampened
expectations while some have shifted to a cautious tone on new hiring. It will be
interesting to see how sky-high inflation and the soaring U.S. dollar have impacted
corporate profits for companies like Apple, Microsoft, UPS, Amazon, and Exxon
Mobile. Overseas, the focus will be on Eurozone inflation figures which could
approach 9% YoY. [2]

Chart of the Week: 10Yr Yields Finally Break Support

Did something big happen this week in the Russell 2000 Index? According to
some intermediate trend indicators, the answer is a definite maybe. The 50- and
200-day moving averages have clearly been moving lower for months. This week
however, the index accomplished something not seen since mid-March with
consecutive closes above the 50-day MA. At the same time, price broke above a  descending trendline connecting a series of lower highs. Could this be an early sign of a trend reversal? To help confirm, some investors would look for prices to retrace back to the 50-day and bounce higher. That might give RUT enough conviction to make a run at the 200-day MA.

Click on the Chart to Enlarge. [3]

Sources: [1] Asset Guidance Group analysis, www.stockcharts.com; All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat,0020Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet [2] tdainstitutional.com; [3] stockcharts.com. 

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